University  of  California. 


Alexander  Del  Mar. 


1878. 


Accessions  No.  /.&?/.&..         Shelf  No. 


A   CRITICAL   EXAMINATION 


FINANCIAL   POLICY 


DURING   THE 


SOUTHEKN    EEBELLION. 


SIMON  MWCOMB. 
«^  I  o  ft  A  i 


.'•AL1F01 

* 


NEW  YORK : 
D.    APPLETON    AND   COMPANY, 

443     A    445     BROADWAY. 

1865. 


EOTEBBD  according  to  Act  of  Congress,  in  the  year  1865,  by 

D.  APPLETON  &  COMPANY, 

In  the  Clerk's  Office  of  the  District  Court  of  the  United  States  for  the 
Southern  District  of  New  York. 


TNI  V  KKSITY 


PREFACE. 


THE  objects  of  tlie  following  essay  are  to 
trace  our  present  financial  system  to  its  effects 
on  the  power  of  our  Government,  the  perma 
nence  of  our  institutions,  the  future  well- 
being  of  society,  and  other  great  national 
interests ;  to  show  how  certain  principles  of 
social  science  are  illustrated  in  its  workings ; 
and,  incidentally,  to  inquire  in  what  ways  it 
may  "be  improved.  The  work  generally 
avoids  those  topics  of  merely  passing  import 
ance,  the  discussion  of  which  belongs  to  the 
daily  press,  and  confines  itself  to  questions 
of  permanent  interest.  '  Aiming  its  criticisms 
at  the  root  of  evil  rather  than  its  branches, 
its  fundamental  doctrines  are  few  and  simple. 


4  PREFACE. 

The  great  desire  of  the  author  has  been  to 
produce  full  conviction  of  the  truth  of  these 
doctrines.  He  has,  therefore,  sought  to  found 
them  solely  on  those  facts  of  human  nature 
which,  established  by  the  general  experience 
of  mankind,  must  be  admitted  by  all  unprej 
udiced  men,  and  those  facts  of  history  which 
are  absolutely  indisputable.  For  the  same 
reason  he  has  avoided  that  large  class  of 
questions  which  do  not  admit  of  a  decided 
answer. 

The  first  two  chapters  were  suggested  by 
the  general  disposition  manifested  in  our  legis 
lative  halls  and  our  organs  of  public  opinion, 
to  ignore  all  that  the  nineteenth  contury  has 
done  for  financial  science,  and  to  adhere  en 
tirely  to  the  views  and  practices  of  the  eigh 
teenth.  Their  object  is  therefore  less  to  de 
velop  a  complete  system  of  ideas  than  to 
amend  the  most  serious  defects  in  the  popu 
lar  Political  Economy. 


CONTENTS. 


CHAPTER   I. 

PASS 

MONEY  AND  TRADE, 9 

The  Laws  of  Trade  Founded  on  Human  Nature — Object  of 
a  Government  Financial  System — Popular  Errors  re 
specting  Finance — The  Laws  of  Value — Popular  Theo 
ries  respecting  the  Degradation  of  our  Standard — Spec 
ulation — The  Money  Market ;  what  Controls  it  ? 

CHAPTER    II. 
THE  FINANCIAL  ELEMENTS  OF  MILITARY  STRENGTH,       34 

The  Measure  of  Military  Strength — Money  not  a  Source  of 
Power — Frugality  the  real  element  of  Power — Political 
Economy  not  Conserved  with  our  Highest  Good — 
Should  we  Save  our  Gold? — Our  War  Expenditure, 
what  does  it  Mean  ? 


t>  .         CONTENTS. 

CHAPTER   III. 

PAGB 

OUB  DEBT  AND  OUB  TAXES,       .        ...        .GO 

Relation  of  the  Individual  to  the  State — Supposed  Bene 
fits  of  the  British  Debt — Perils  in  which  our  Debt  will 
Involve  us — How  to  Carry  on  "War  without  Borrowing 
— When  Advisable  to  Borrow — Ought  our  Debt  to  be 
Taxable? 

CHAPTER   IV. 

THE  LEGAL  TENDER  NOTES — THEIR  EFFECT  ON  PUB 
LIC  CREDIT,       v      .       V.        .      -.        .      88 

What  the  Legal  Tender  Act  was — Failure  to  give  the  Notes 
any  Element  of  Value — The  Evil,  one  of  Principle — 
Payment  of  the  Principal  of  the  Public  Debt— The 
Price  of  Gold  and  Government  Bonds — Causes  of  the 
Depreciation  in  the  Gold  Value  of  the  Bonds — How  all 
future  Loans  should  be  Contracted. 

CHAPTER   V. 

INFLUENCE  OF  THE  LEGAL  TENDER  NOTES  ON  PRI 
VATE  FAITH  AND  THE  BUSINESS  OF  THE  COUN 
TRY,  .  .  .  .  *  .  .  .  .  .  122 

Laws  of  Value  of  the  Currency — Effects  of  Depreciation 
on  Banks,  etc., — Effects  of  Depreciation  on  Ownership 
of  Property— Effects  of  Depreciation  on  our  Future 
Welfare. 

CHAPTER   VI. 

NECESSITY  OF  PAPER  MONEY — THE  LESSONS  OF  HIS 
TORY.  146 

Popular  Views — The  English  Bank  Money — Continental 
Money,  what  it  did — Rise  and  Fall  of  Assignats. 


CONTENTS.  7 

CHAPTER    VII. 

PAOll 

WERE  LEGAL  TENDER  NOTES  NECESSARY?       .        .159 

The  True  Functions  of  Notes — Our  Financial  History  had 
Specie  Payments  been  maintained — Ought  the  Notes  to 
be  Irredeemable  ?— Ought  they  to  have  been  Legal  Ten 
der  for  Principal  of  the  Public  Debt  ? — Was  it  neces 
sary  that  they  should  be  a  Legal  Tender  for  Private 
Debts  ?— rExamination  of  Arguments  for  the  Legal  Ten- 
^er  Clause>— Causes  of  our  Financial  Mistakes. 

CHAPTER   VIII. 
THE  NATIONAL  BANKING  SYSTEM,       .        .        .        .199 

Functions  of  Banks — Popular  Errors  respecting  our  Cur 
rency — Who  Lends  to  the  Government  ? — Working  of 
our  National  Banking  System — Unwise  Restrictions  in 
the  way  on  which  they  might  use  their  Votes — Their 
Functions  as  Fiscal  Agents. 


A  CRITICAL  EXAMINATION 

OF    OUR    FINANCIAL    POLICY 


CHAPTEK  I 

MONEY     AND     TRADE. 

THE  feelings  and  opinions,  the  hopes  and  fears 
of  the  million,  form  an  ocean  of  thought  in  which 
the  individual  is  lost  as  the  drop  is  lost  in  the  At 
lantic.  Tempests  of  passion  agitate  the  surface  of 
this  ocean,  but  .they  cannot  change  its  general  level, 
nor  drive  it  from  its  set  bounds.  It  ebbs  and  flows 
under  the  influence  of  victory  and  defeat,  and  a 
thousand  other  causes,  many  of  which  we  can  trace 
only  in  their  effects.  Like  the  Atlantic,  this  ocean 
is  at  once  the  most  uncontrollable  of  powers,  and 
the  most  manageable  of  instruments.  Address  the 
sea ;  reason  with  it ;  legislate  against  its  tides ;  quar 
rel  with  its  storms ;  enact  that  it  shall  change  its 
winds  ;  complain  of  its  destructiveness  ;  demonstrate 
to  it  that  there  is  no  good  cause  for  the  fury  of  its 
waves,  and  you  are  impotent.  Accept  it,  with  all 
its  vagaries,  as  unchangeable  facts ;  study  its  winds 
1* 


10  MONEY   AND   TRADE. 

and  currents  as  they  are,  without  seeking  to  change 
them ;  trim  your  sails  and  guide  your  helm  accord 
ingly,  and  you  are  carried  in  safety  to  your  desired 
harbor.  With  all  the  improvements  man  has  made 
in  navigation  since  the  time  the  Phoenician  first 
launched  his  boat  on  the  Mediterranean,  he  has  never 
brought  a  breath  of  wind  under  his  control,  or  com 
manded  a  single  billow.  Yet  the  most  adverse 
wind  is  his  servant,  and  takes  him  whither  he  will. 
In  a  similar  way  kings  and  statesmen  have  swayed 
"  the  rod  of  empire  "  over  millions,  and  made  the 
very  selfishness  of  mankind  to  minister  to  them 
without  causing  any  change  in  human  nature,  or 
altering  the  motives  of  a  single  individual. 

Of  this  mass  of  thought  and  opinion  none  is  more 
intractable  when  we  seek  to  control  it,  none  more 
manageable  when  we  adopt  the  proper  means  to  use 
it,  than  that  which  relates  to  money,  prices,  and  cred 
it.  No  sooner  do  men  begin  to  trade  in  great  num 
bers  than  they  find  laws  of  trade  which  are  beyond 
individual  control.  They  find  that  an  increased  sup 
ply  of  an  article  will  diminish  its  price,  and  an 
increased  demand  raise  it ;  that  goods  will  flow  to 
the  best  market  in  defiance  of  every  thing  except 
forcible  prevention ;  that  the  man  who  sells  cheap 
est  will  have  most  custom,  though  hated  by  the 
community.  So  long  as  no  attempt  is  made  to 
interfere  with  the  orderly  operation  of  these  laws 
they  might  pass  with  little  notice.  But,  by  and 
by  the  king,  or  the  Government,  finds  that  they 


MONEY   AND   TKADE.  11 

are  operating  so  as  to  be  detrimental  to  his  interests  ; 
that  the  prices  of  articles  which  he  wishes  to  obtain, 
articles  which  suddenly  become  indispensable  to  the 
public  good,  jump  up  with  equal  suddenness,  that 
his  promises  to  pay  are  not  properly  appreciated 
by  the  community ;  that  men  will  prefer  the  money 
which  he  cannot  obtain  to  that  which  he  has  to  pay 
with.  He  attributes  all  this  to  the  machinations  of 
his  enemies,  and  the  heartless  selfishness  of  individ 
uals,  and  forthwith  resorts  to  penal  and  manda 
tory  legislation  for  a  remedy.  He  enacts  that  his 
promises  to  pay  shall  be  as  valuable  as  gold.  Gold 
instantly  disappears.  He  then  enacts  that  they 
shall  be  legal  tender.  Immediately  every  man  who 
has  goods  for  sale  doubles  or  trebles  the^r  prices, 
so  that  the  Government  is  still  no  better  off  than 
before.  As  a  last  resort  he  enacts  that  bread  and 
meat  shall  be  sold  at  old  prices.  Bread  and  meat 
thereupon  disappear  like  the  gold,  except  as  they 
are  sold  clandestinely  at  the  increased  prices.  The 
butchers  no  longer  come  to  market,  the  bakers  dis 
appear  from  the  community  like  icebergs  melt  in 
the  Gulf  Stream.  The  farmers  cease  to  cultivate 
their  fields,  engines  stop  working,  mines  fill  np, 
grass  grows  in  the  streets,  starvation  and  ruin  stare 
the  public  in  the  face. 

Experiments  like  this  have  been  tried  by  kings 
and  princes  and  legislators  from  time  immemorial, 
and  always  with  the  same  result.  The  weakest 
Government,  and  the  most  powerful ;  the  king  and 


12  MONEY  AND  TEADE. 

the  president,  the  despotism  and  the  republic ;  the 
ferocity  of  the  triumvirate  and  the  wisdom  of  Parlia 
ment  have  been  alike  impotent.  Why  is  this? 
Why  cannot  two  men  of  two  millions  of  men, 
acting  through  their  chosen  representatives,  mutual 
ly  agree  that  they  will  furnish  the  products  of  their 
labor  in  certain  quantities  and  on  certain  fixed 
terms  ?  WKat  laws  regulate  the  value  of  gold,  the 
price  of  government  stocks,  and  the  price  of  goods  ? 
These  questions  must  have  risen  in  the  philosophi 
cal  mind  on  every  exhibition  of  the  phenomena  to 
which  we  have  alluded.  In  answering  them  a  new 
science  was  constructed,  that  of  Political  Economy. 

This  science  showed  how  the  selfishness  of  in 
dividuals  was  made,  in  the  social  system,  to  con 
tribute  in  the  highest  degree  to  the  public  good.  It 
showed  that  men  labored  primarily,  not  for  the 
benefit  of  others,  but  of  themselves  ;  that  they  bene 
fited  others  by  their  labor  on  condition  that  others 
should  benefit  them;  that  they  would  dispose  of 
their  labor  in  such  manner  and  give  its  products  to 
such  persons  as  to  receive  the  greatest  possible 
benefit  in  return ;  and  that  thus,  while  every  man 
would  really  be  working  from  pure  selfishness,  that 
very  motive  would  lead  him  to  exert  himself  so  as 
to  do  the  greatest  good  to  the  community. 

It  has  also  shown  that  the  function  of  money 
is  simply  to  cause  these  exchanges  to  be  made 
in  the  way  most  advantageous  to  all  parties ;  so 
that  every  man  shall  be  able  to  receive  whatever 


MONEY   AND   TKADE.  13 

article  he  most  wishes  in  exchange  for  his  goods,  no 
matter  whether  the  man  who  makes  this  article 
shall  want  his  goods  or  not ;  T;hat  the  value  of  this 
money,  if  useless  for  other  purposes  than  money,  is 
fixed  entirely  by  the  wants  of  the  community  ;  and 
that  the  value  of  all  manufactured  goods,  and  indeed 
of  every  thing  else,  is  in  the  long  run  measured 
by  the  amount  of  labor  necessary  to  their  produc 
tion,  or  their  possession. 

It  can  also  be  shown  that  for  a  people  to  fix 
among  themselves  and  mutually  a  standard  of 
prices,  such  that  every  man  will  have  to  exchange 
his  goods  for  so  little  money  that  he  would  in  his 
own  heart  rather  have  the  goods  than  the  money, 
is  simply  to  introduce  a  system  of  communism,  in 
which  men  will  have  to  work,  not  for  what  they 
receive  in  exchange  for  their  goods,  but  for  the 
benefit  of  the  commonwealth.  True,  if  men  were 
neither  indolent  nor  selfish  the  community  would 
then  enjoy  nearly  as  much  wealth  as  they  actually 
do;  but  the  fact  is  that  men  always  have  been 
indolent  and  selfish,  and  always  will  be.  These 
characteristics  are  not  to  be  deplored;  they  only 
keep  in  operation  the  just  principle  that  the  fruits 
of  every  man's  toil  belong  to  himself,  and  that  he 
has  the  right  to  fix  the  terms  on  which  he  will  part 
with  them. 

Political  economy  as  a  pure  science  is  founded 
on  this  postulate  of  human  nature  :  that  every  man 
will  dispose  of  his  labor  in  such  a  way  as  to  pro- 


14  MONEY   AND   TRADE. 

mote  to  the.  greatest  possible  extent  the  objects  of 
his  desire  ;  and  will  endeavor  to  attain  any  definite 
end  with  the  least  possible  amount  of  irksome  labor. 
The  savage  and  the  sage  alike  exhibit  this  character 
istic,  they  differ  only  in  the  nature  of  their  desires. 
On  it  is  founded  the  science  of  Political  Economy. 
All  the  conclusions  of  this  science  are  perfectly  true 
and  quite  applicable  to  practice  so  far  as  the  actions 
of  men  are  governed  by  it,  and  no  longer.  Now,  it  is 
a  fact  of  observation  which  has  held  true  in  all  ages 
and  countries,  that  all  voluntary  exchanges  of  prop 
erty  between  man  and  man  are  made  in  obedience 
to  the  above  postulate.  No  man  parts  with  his 
goods  except  he  is  to  receive  in  exchange  something 
which  he  prefers  to  them.  No  man  will  work  two 
days,  or  give  two  dollars  for  an  object  of  desire, 
when  he  can  get  it  for  one.  Any  government 
polity  which  supposes  men,  in  managing  their 
money  matters,  to  be  actuated  by  benevolence,  ma 
levolence,  public  spirit,  political  enmity,  or  any 
other  motive  than  self-interest,  is  fundamentally 
defective,  and  will  be  sure  to  fail.  Hence,  to  an 
swer  the  question,  "  What  will  a  man  do  with  his 
money  ?  "  it  is  only  necessary  to  discover  what  it  is 
for  his  interest  to  do. 

We  are  not  at  present  concerned  with  the  whole 
of  this  science,  but  with  an  application  of  its  princi 
ples  to  our  financial  policy  during  the  present  war. 
Four  years  ago  our  Government  was  attacked  and 
our  liberties  threatened  by  a  combination  at  once 


MONEY   AND  TRADE.  15 

the  most  malignant  and  the  most  unscrupulous 
which  any  people  ever  had  to  contend  against. 
The  Government  and  'the  social  system  which  we 
were  to  transmit  to  our  posterity  had  to  be  decided 
by  the  issues  of  battle.  A  vast  amount  of  work 
had  to  be  done  in  the  way  of  feeding  and  clothing 
armies,  casting  cannon,  shot,  and  shell,  and  putting 
in  operation  all  the  complicated  enginery  of  modern 
warfare.  The  war  once  inevitable,  each  of  our 
twenty  millions  of  people  was  willing  to  bear  his 
share  of  its  burden,  rather  than  see  his  country  sub 
jected  to  those  who  would  conquer  it.  To  distribute 
this  burden  so  that  none  should  be  able  to  shirk  his 
just  share,  or  throw  it  upon  his  neighbor ;  so  that 
the  total  burden  should  be  as  light  as  possible ;  so 
that  the  ownership  of  property  should  be  disturbed, 
the  business  and  growth  of  the  country  impeded, 
and  honesty  and  frugality  discouraged  as  little  as 
possible ;  this  was  or  ought  to  have  been  the  finan 
cial  problem.  True,  it  was  disguised  under  the  form 
of  raising  loans  and  levying  taxes,  so  that  the  end 
really  aimed  at  was  almost  lost  sight  of,  and  to  this 
circumstance  all  the  mistakes  that  were  made  may 
perhaps  be  traced. 

The  attention  of  the  reader  is  called  to  the 
means  employed  to  attain  these  ends.  It  is  pro 
posed  to  examine  how  far  the  burden  of  the  war  has 
been  equitably  distributed,  and  what  efiect  the 
policy  pursued  has  had  and  is  likely  to  have  upon 
public  credit,  private  honesty,  and  the  ownership  of 


16  MONET   AND  TRADE. 

property.  The  whole  foundation  of  our  reasoning 
shall  be  admitted  principles  or  indisputable  facts, 
and  all  appeal  to  or  respect  for  mere  authority  shall 
be  avoided. 

It  will  conduce  to  clearness  if  we  first  try  to 
form  a  definite  idea  of  what  financial  science  really 
is.  Notwithstanding  the  simplicity  of  its  principles, 
and  their  continued  illustration  in  the  affairs  of  life, 
the  most  crude  and  impractical  ideas  are  entertained 
respecting  them.  We  are  prone  to  fall  into  two 
great  errors,  closely  connected  with  each  other : 
firstly,  that  there  is  no  such  thing  as  financial 
science  ;  and  secondly,  that  questions  of  finance  are 
too  mysterious  to  be  comprehended  by  the  people  at 
large. 

The  speculations  of  many  of  our  newspapers  and 
other  organs  of  public  opinion  illustrate  the  first 
mistake.  Their  reasonings  on  questions  of  govern 
ment  credit  are  remarkably  like  the  speculations  of 
the  ancient  philosophers  on  questions  of  natural  phi 
losophy.  We  find  the  same  disposition  to  frame 
imaginative  theories,  and  the  same  indisposition  to 
learn  any  thing  from  experience.  We  see  every 
effect,  every  fall  in  stocks,  and  every  rise  in  gold 
attributed  to  some  cause,  but  how  the  cause  pro 
duces  the  effect  is  left  as  much  a  mystery  as  how  a 
comet  or  an  eclipse  used  to  cause  the  death  of  a 
king  or  the  fall  of  an  empire.  The  money  market 
is  peopled  with  good  and  evil  spirits,  with  "  gor- 
gons,  hydras,  and  chimeras  dire,"  who  are  waging  a 


MONEY   AND   TRADE.  IT 

perpetual  war,  or  playing  an  endless  game  of 
Stygian  ten-pins,  using  government  stocks  for  the 
pins.  Like  those  household  spirits  who  are  always 
ready  to  masticate  a  child  without  reference  to  the 
calls  of  their  stomachs,  or  the  gustatory  pleasure  to 
be  derived  from  the  operation,  these  bulls  and  bears, 
hobgoblins  of  the  stock  market,  are  not  animated  by 
any  well-defined  motives  except  a  Satanic  desire  to 
destroy  the  government  credit.  It  can,  I  trust,  be 
shown  to  the  satisfaction  of  every  thinking  man,  that 
all  these  sprites,  including  that  king  of  hobgoblins 
the  gold  speculator,  are  as  powerless  to  injure  the 
government  credit  as  they  are  to  change  the  course 
of  the  wind. 

The  second  error  to  which  we  have  referred  is 
worthy  of  much  more  careful  examination.  That 
the  principles  of  finance,  like  the  art  of  banking, 
are  to  be  learned  by  long  experience  behind  a  coun 
ter,  and  that  those  only  who  have  had  this  experi 
ence  are  qualified  to  judge  of  the  effects  of  financial 
measures,  is  an  opinion  so  respectable  and  conser 
vative  that  it  may  seem  an  art  of  presumption  to 
controvert  it.  There  is  a  disposition  to  look  on 
finance  as  an  art  to  be  learned  in  school  or  the 
counting-house,  rather  than  a  science  to  be  studied 
by  the  aid  of  human  nature,  and  the  use  of  sound 
logic.  In  opposition  to  this  view  it  is  maintained 
that  common  sense,  close  study,  and  attentive 
thought,  with  such  experiential  knowledge  as  every 
one  may  derive  from  the  observation  of  current 


18  MONEY   AND   TKADE. 

events  are  all  that  is  necessary  to  enable  any  one  to 
comprehend  the  working  and  the  effects  of  any 
financial  system,  and  to  judge  the  arguments  for 
and  against  it ;  and  that  a  lawyer  may  therefore  be 
as  good  a  judge  of  such  a  system  as  a  banker,  pro 
vided  that  he  will  make  himself  master  of  the  prin 
ciples  on  which  it  is  founded. 

It  will  be  universally  admitted  that  experience 
can  increase  any  man's  power  of  correctly  judging 
the  effects  of  a  new  measure  only  when  the  things 
to-be  judged  are  similar  to  those  which  he  has  met 
with  in  experience.  For  instance,  if  a  banker  had 
always  done  business  in  a  community  which  would 
allow  nothing  but  coin  to  circulate  as  money,  he 
would  not  thereby  be  better  qualified  to  judge  of 
the  finances  of  a  people  whose  circulating  medium 
was  irredeemable  paper.  Nay,  he  would  be  rather 
worse  qualified,  because  he  would  be  likely  to  adopt 
conclusions  founded  on  his  former  experience,  with 
out  duly  considering  the  change  of  circumstances ; 
he  might  consider  money  as  being  simply  money, 
whatever  its  material,  and  totally  forget  that  paper 
and  metallic  money  are  governed  by  entirely  differ 
ent  laws.  To  judge  the  effects  of  a  new  measure 
adapted  to  new  circumstances,  requires  experience 
of  old  measures  much  less  than  sound  judgment, 
a  clear  comprehension  of  human  nature,  and  a  clear 
understanding  of  Political  Economy. 

But  if  we  propose  to  put  an  old  plan  once  more 
in  operation,  will  not  the  advice  of  those  who  have 


MONEY   AND   TKADE.  19 

seen  the  old  plan  work  be  of  great  value  ?  Un 
doubtedly  it  will.  A  young  cashier  of  a  new  bank 
will  seldom  fail  to  be  benefited  by  the  advice  of  an 
old  cashier.  The  advice  of  Washington,  Franklin, 
and  Hamilton,  who  saw  the  rise,  fall,  and  effects  of 
the  Continental  money,  would  have  been  invaluable 
when  it  was  first  proposed  to  issue  greenbacks. 
Still  more  valuable  would  have  been  the  advice  of 
Mr.  John  Stuart  Mill,  because  he  not  only  knew 
what  had  been  the  paper-money  experience  of  past 
generations,  but  in  addition  thoroughly  understood 
the  principles  which  must  underlie  every  financial 
system.  His  opinion  ought  therefore  to  have  been 
entitled  to  more  weight  than  that  of  any  banker  or 
board  of  trade. 

The  weight  which  any  opinion  ought  to  carry 
with  it  depends  very  much  on  the  reasons  as 
signed  for  it.  In  a  science  so  exact  as  that  of  polit 
ical  economy,  we  can  trace  the  effect  of  every  intel 
ligible  cause.  If,  then,  we  are  informed,  on  authori 
ty,  that  such  a  measure  will  produce  evil  effects, 
and  such  another  measure  good  effects,  we  may 
reasonably  demand  to  know  how  this  good  or  evil 
is  to  be  produced.  If  the  authority  fails  to  explain 
to  our  entire  satisfaction  the  relation  between  the 
cause  and  the  effect  which  he  predicts,  if  he  claims 
that  it  is  something  which  no  one  but  financiers  can 
understand,  then  we  may  safely  reject  his  advice.  It 
is  not  enough  that  we  know  certain  effects,  good  or 
evil,  to  have  followed  certain  measures;  we  must 


20  MONEY   AND   TEADE. 

also  be  able  to  understand  the  machinery  by  which 
these  effects  were  produced.  It  is  now  proposed  to 
elucidate  some  of  the  most  elementary  principles 
which  govern  the  working  of  every  system  of  finan 
cial  machinery. 

In  the  first  place,  the  desires  and  opinions  of 
men  are  to  be  accepted  as  fundamental  facts,  with 
out  criticizing  the  foundation  on  which  they  rest. 
Government  credit  is  a  fact,  not  a  mathemetical 
theorem.  It  is  not  to  be  measured  by  calculating 
our  resources,  praising  our  honesty,  and  demon 
strating  our  ability  to  pay,  but  by  observing  what 
our  bonds  sell  for  in  the  public  market.  To  say 
that  men  ought  to  give  more  or  less  than  they  do, 
because  the  bonds  are  really  worth  more  or  less,  is  as 
idle  as  to  say  that  stones  ought  to  float,  or  wood  sink. 
The  financier  is  not  concerned  with  what  ought  to 
be,  but  with  what  is ;  not  with  what  men  ought  to 
think,  but  with  what  they  do  think.  He  does  not 
seek  to  mould  public  opinion,  for  he  knows  that  the 
money  market  is  insensible  to  argument  or  expostu 
lation.  Men  are  determined  to  be  their  own  judges 
of  what  is  for  their  own  pecuniary  interests.  We 
have  had  pamphlets  proving  that  we  are  amply 
able  to  pay  off  our  national  debt,  and  publications 
trying  to  show  that  such  payment  is  impossible ;  but 
the  price  of  government  bonds  refused  to  respond 
to  either  argument.  During  the  winter  of  1862-'3 
the  value  of  20  year  six  per  cent,  bonds  gradually 
fell  far  below  that  of  legal  tender  notes.  During 


MONEY   AND  TRADE.  21 

the  fall  the  public  was  almost  daily  lectured  on  the 
absurdity  of  preferring  a  debt  which  bore  no  in 
terest,  and  which  depreciated  twenty  or  thirty  per 
cent,  below  coin,  to  a  debt  which  bore  interest  in 
coin,  but  the  lecturers  might  as  well  have  talked  to 
the  winds.  The  bonds  continued  to  fall  until,  with 
the  improvement  in  the  military  situation,  and  the 
increased  issue  of  notes,  the  money  market  slackened, 
and  the  demand  for  the  bonds  began,  from  this 
cause,  to  increase.  Deeds,  not  words,  is  emphati 
cally  the  maxim  of  the  stock  market. 

In  the  next  place  the  fundamental  postulate  of 
political  economy  already  alluded  to,  that  every 
man  will  seek  to  attain  the  objects  of  his  desire  at 
the  smallest  expense  of  labor,  is  to  be  taken  for 
granted,  else  financial  science  can  have  no  existence. 
Actions  not  in  accordance  with  this  principle  are 
mere  child's  play.*  Our  whole  monetary  and  in 
dustrial  fabric  rests  upon  it.  From  it  follow  the 
laws  of  value,  and  price,  which  we  shall  briefly  set 
forth  and  illustrate. 

1.  The  real  value  of  an  article,  money  included, 
is  measured  by  the  least  amount  of  labor  necessary 
to  its  possession.  .  If  a  barrel  of  flour  costs  three 
days'  labor,  and  a  coat  costs  twelve,  then  one  coat 
will,  on  the  average,  sell  for  as  much  as  four  barrels 
of  flour.  So  long  as  an  ounce  of  gold  can  be  got  as 

*  When  Vanderbilts  arise  in  sufficient  number  to  give  us  an  iron 
clad  navy,  it  will  be  time  to  cite  examples  of  patriotic  munificence  as 
exceptions  to  this  rule. 


22  MONEY  AND  TRADE. 

easily  as  a  coat  can  be  made,  we  may  be  sure  that 
the  latter  will  sell  for  as  much  as  the  former. 

2.  The  relative  value  of  articles,  thus  fixed,  fluc 
tuates  under  the  influence  of  variations  in  the  sup 
ply  and  demand.     But  the  equilibrium  cannot  be 
permanently  changed  by  the  action  of  these  causes, 
because,  if  they  continue,  men  will  gradually  give 
up  the  production  of  those  articles  which  are  too 
cheap,  and  apply  themselves  to  those  which  are  too 
dear,  until,  by  competition,  the  equilibrium  of  prices 
is -restored.     Indeed,  a  largely-increased  demand,  if 
permanent,  will  generally  diminish  the  value  of  the 
article,  because  things  can  be  made  cheaper  when 
made  in  large  quantities. 

3.  Whenever  the  business  of  a   country  rises 
above  mere  barter,  a  common  accepted  standard, 
by  which  every  man  can  estimate  the  value  of  his 
goods,  becomes  indispensable.    A  designated  weight 
of  one  of  the  precious  metals  forms  the  best  stand 
ard  attainable,  because  these  metals  are  universally 
desired,  and  subject  to  no  serious  fluctuations  of 
value.     Hence  they  have  been  used  for  this  pur 
pose  from  the  earliest  ages.     The  price  of  an  article 
is  its  value,  measured  by  the   accepted  standard. 
By  a  change  in  the  standard,  the  price  may  change, 
without  any  corresponding  change  in  the  real  value, 
just  as  by  diminishing  the  yard  measure  we  in 
crease  the  number  of  yards  in  a  piece  of  cloth. 
The  cupidity  land  the    prejudice  of   governments 
have  many  times  prompted  the  alteration  of  the 


MONEY   AND   TRADE.  23 

legal  standard.  This  has  generally  been  done  by 
changing  the  weights  of  the  coins;  as  when  the 
profligate  Roman  emperor  Elagabulus,  who  was  en 
titled  to  receive  pieces  of  gold  from  his  subjects, 
cunningly  increased  the  amount  of  gold  in  the 
aureus;*  and  the  kings  of  England,  when  they 
found  their  debts  pressing  heavily,  diminished  the 
weight  of  the  pound  sterling,  in  order  that  they 
might  the  more  easily  discharge  them.f  In  mod 
ern  times  the  change  of  standard  has  generally  been 
effected  by  substituting  paper  for  coin.  In  such 
cases  ignorance  and  prejudice  have  generally  dic 
tated  the  total  repudiation  of  the  old  standard,  and 
the  reference  of  all  values  to  the  new  one.  This 
has  been  aptly  likened  to  "  hiding  the  thermometer  " 
in  order  to  avoid  the  heat. 

These  degradations  of  the  standard  of  value,  in 
order  that  debts  may  be  more  easily  discharged,  are 
as  gross  a  fraud  as  a  diminution  of  the  yard  meas 
ure  by  a  power  which  had  agreed  to  furnish  a  cer- 

*  Encyclopaedia  Britannica  (Art.  MONEY).  It  is  here  suggested 
that  Elagabalus  took  the  hint  from  a  governor  of  the  Gauls  under 
Augustus,  who  divided  the  year  into  fourteen  months,  instead  of 
twelve,  because  the  Gauls  paid  a  certain  monthly  tribute. 

f  From  the  Norman  Conquest  until  the  reign  of  Edward  III.,  the 
pound  sterling  contained  a  pound  of  silver.  From  that  time  until 
Edward  VI.,  there  was  an  almost  continual  degradation  of  the  stand 
ard.  It  is  now  less  than  one-third  its  original  value.  But  this  was 
nothing  to  the  doings  of  the  House  of  Stuarts,  in  Scotland,  who,  in  a 
century  and  a  half,  reduced  the  quantity  of  silver  hi  the  pound  to  less 
than  one-twentieth  its  former  amount. 


24  MONEY   AND   TKADE. 

tain  amount  of  cloth,  in  order  that  he  might  fulfil 
his  contract  in  name  without  doing  it  in  deed. 
Why,  then,  have  they  not  met  with  a  reprobation 
corresponding  to  their  criminality  ?  The  answer  is 
obvious  :  a  measure  of  value  is  not  directly  cogni 
zable  by  the  senses,  like  the  length. of  a  yard-stick. 
For  a  long  time,  therefore,  the  name  usurps  the 
place  of  the  thing.  The  new  "  pound,"  "  franc," 
or  "  dollar,"  is  called  by  the  same  name  as  the  old 
one ;  and  even  when  every  one  sees  that  one  old  dol 
lar  will  sell  for  two  new  ones  in  the  market,  it  is 
difficult  to  conceive  that  this  does  not  proceed  in 
part  from  an  increase  in  the  value  of  the  old  one. 
The  illusion  can  be  completely  eradicated  only  by 
remembering  that  the  gold  mines  yield  their  treas 
ures  as  freely  as  ever,  and  that  in  foreign  countries 
the  old  coins  are  no  more  valuable  than  before. 
But,  if  the  yard  measure  were  reduced  to  eighteen 
inches,  every  one  would  see  at  once  that  the  new 
yard  was  only  half  as  long  as  the  old  one ;  that  a 
piece  of  cloth  which  formerly  measured  thirty  yards 
was  no  longer  than  before,  although  it  now  meas 
ured  sixty ;  that  if  he  had  loaned  thirty  yards  of 
cloth  before  the  change  of  measure,  he  would  be 
defrauded  out  of  half  his  just  due  if  compelled  to 
receive  thirty  of  the  new  yards  as  an  equivalent. 

4.  Although,  by  such  changes  in  the  standard 
of  value,  the  equilibrium  of  prices  may  be  tempo 
rarily  disturbed,  this  disturbance  cannot  be  perma 
nent.  The  disturbance  is  felt  in  the  wholesale  be- 


MONEY    AND   TRADE.  25 

fore  being  felt  in  the  retail  market ;  in  the  prices  of 
those  articles  the  production  of  which  requires  an 
easily-calculated  expenditure  of  labor,  before  it  is 
felt  in.  those  of  which  the  labor  of  production  can 
not  be  exactly  estimated.  Sooner  or  later,  however, 
all  prices  must  change  to  correspond  to  the  new 
standard.  The  price  of  no  one  article  of  general 
use  can  be  permanently  raised  in  this  way  without 
lifting  all  other  prices  with  it.  Let  us  take  gold 
for  example,  because  this  is  the  standard  to  which 
all  other  standards  must  be  referred.  Suppose  that 
every  man  who  has  a  gold  dollar  can  get  two  dol 
lars  in  currency  for  it  from  a  speculator,  from  his 
neighbor,  or  from  any  one  else,  while  they  will  give 
him  no  more  than  beforeTor  the  products  of  his 
labor.  If  he  makes  butter,  flour,  clocks,  or  any 
thing  which  we  are  in  the  habit  of  exporting,  self- 
interest  will  make  him  refuse  the  prices  offered,  and 
export  his  goods,  in  order  to  receive  gold  for  them. 
Thus,  the  price  of  his  goods  will  certainly  go  up  to 
correspond  with  gold.  The  prices  of  goods  which 
cannot  be  exported  must  follow,  because  otherwise 
men  would  gradually  stop  making  them,  and  turn 
their  attention  entirely  to  exportable  commodities. 
Thus  beginning  at  the  stock  and  wholesale  market, 
the  wave  would  gradually  roll  under  every  class  of 
business,  until  it  reached  the  street  lozenge-vender, 
who  would  charge  four  cents  instead  of  two  for  a 
paper  of  lozenges. 

The  increase  of  prices  in  our  country  furnishes 
2 


20  MONEY   AND  TEADE. 

a  very  good  illustration  of  the  principles  laid  down. 
Two  economic  theories  respecting  this  state  of  things 
have  been  so  widely  disseminated  that  it  is  well 
worth  while  to  give  them  a  close  examination. 
Those  who  hold  them  would  probably  express  them 
as  follows : 

1.  The  rise  in  gold  does  not  correctly  and  fairly 
express   a   depreciation   of  our  legal   standard   of 
value,  but  is  in  part  fictitious.     Although  a  dollar 
note  will  only  bring  from  forty  to  fifty  cents  in  gold, 
it  is  really  worth  more.     The  price  of  every  thing 
did  not  go  up  to  correspond  with  gold. 

2.  Granting  that  the  depreciation  of  the  stand 
ard  is  real,  it  is  the  work  of  stock-jobbers  and  spec 
ulators,  who  have  compassed  the  depreciation  in 
order  to  forward  their  own  selfish  ends. 

Perhaps  the  former  doctrine  can  be  most  easily 
and  conclusively  refuted  by  an  appeal  to  first  prin 
ciples.  It  is  indisputable -that  men  on  the  average 
can  now  possess  themselves  of  a  dollar  in  green 
backs  with  as  much  ease  as  they  could  obtain  forty 
or  fifty  cents  in  gold  before  the  war,  barring  the  in 
significant  tax  on  production  levied  by  the  General 
Government.  Every  man  who  feeds  us,  every  man 
who  clothes  us,  nearly  every  one  who  ministers  to 
our  wants  in  any  form,  gets  in  return  from  two  to 
three  times  the  money  he  got  before,  without  work 
ing  any  harder  for  it.  The  merchant  makes  twice 
as  much  money  by  buying  and  selling  the  same  act 
ual  amount  of  goods,  the  butcher  gets  two  or  three 


MONEY    AND   TEADE.  27 

times  as  much  for  his  meat,  and  the  farmer  for  his 
corn.  Labor  being  the  most  natural  measure  of 
value  of  which  we  can  conceive,  it  follows  that  men 
do  not  desire  and  therefore  do  not  value  a  dollar  of 
our  present  currency  more  than  the  amount  of  our 
old  money  which  the  present  dollar  will  purchase. 

It  may  be  answered  that  there  is  no  good  reason 
for  this  great  depreciation  of  the  standard ;  that  the 
notes  are  really  secure,  and  will  be  as  good  as  gold 
when  the  war  ends.  The  only  objection  to  this 
argument' is,  that  it  does  not  bear  on  the  point  in 
question.  We  are  not  concerned  with  the  real  value 
of  the  money,  but  with  the  estimate  which  the  com 
munity  at  large  set  upon  it.  Individuals  are  but 
drops  in  the  ocean.  A  few  such  drops  may  object 
to  the  tidal  influence  of  the  moon  and  insist  on  re 
maining  on  the  beach  while  the  tide  recedes,  but  the 
ebb  and  flow  will  go  on  just  the  same  in  spite  of 
them. 

In  logical  strictness,  the  second  argument,  that 
against  speculators,  is  irrelevant  to  our  subject. 
The  cause  of  the  depreciation  does  not  alter  the  fact, 
nor  does  it  affect  the  consequences  which  flow  from 
that  fact.  It  is  of  -interest  to  us  only  so  far  as  it  is 
under  our  control,  and  it  is  impossible  to  control 
speculation  without  entirely  prohibiting  all  business. 
But  the  doctrine  that  speculation  is  the  cause  of  all 
the  disturbance  has  been  repeatedly  endorsed  in  such 
high  official  quarters,  and  has  taken  such  deep  root 
in  the  public  mind,  that  it  is  worth  while  to  analyze 


28  MONEY   AND  TRADE. 

it.  Singular  as  it  may  seem,  this  doctrine  lias  been 
most  strenuously  maintained  by  the  supporters  of 
the  paper  standard,  who  should  have  been  the  last 
ones  to  admit  it ;  for  if  such  a  standard  is  really  at 
the  mercy  of  a  class  of  gamblers,  this  very  fact  would 
furnish  the  strongest  argument  against  its  adoption. 
Speculation  consists  in  buying  goods  in  anticipa 
tion  of  a  rise  in  their  price,  in  order  to  make  a  prof 
it  by  selling  them  after  the  rise.  The  speculator 
may  intend  to  bring  about  the  rise  himself;  or  he 
may  only  take  advantage  of  it  without  being  in  any 
way  the  cause  of  it.  If  the  market  offers  but  a 
limited  supply  of  some  indispensable  article,  he  se 
cretly  and  suddenly  buys  the  stock  on  hand,  and 
then  compels  the  public  to  buy  from  him  at  his  own 
price  until  a  new  supply  can  be  obtained.  In  such 
a  case  as  this  the  speculator  is  really  the  cause  of 
the  rise.  The  more  necessary  the  article  and  the 
more  limited  the  supply,  the  more  easy  is  this  oper 
ation.  Gold  is  about  the  last  thing  in  the  world  to 
be  operated  on  in  this  way,  because  it  is  something 
which  the  whole  world  are  always  ready  to  supply, 
and  which  no  one  is  compelled  to  provide  himself 
with.  The  absurdity  of  any  attempt  to  raise  the 
price  of  gold  artificially  may  be  easily  illustrated. 
Suppose  that  all  the  speculators  in  the  country  unite 
themselves  into  a  firm  for  the  express  purpose  of 
raising  the  price  of  gold.  While  the  people  at 
large  are  willing  to  sell  their  goods  at  double  the 
gold  price,  this  firm  sets  the  price  of  gold  at  250. 


MONEY   AND   TRADE.  29 

To  make  the  case  as  favorable  as  possible,  suppose 
they  have  got  possession  of  all  the  gold  in  the  mar 
ket  and  refuse  to  sell  for  less  than  260,  while  they 
offer  250  for  all  that  may  be  brought  to  them. 
"What  will  be  the  effect  ?  A  shipper  has  $10,000  in 
gold  which  he  is  about  to  export  to  England  for 
dry  goods.  On  seeing  the  speculator's  offer,  he 
modifies  his  venture  by  selling  his  gold  to  them  for 
$25,000  in  currency,  with  which  he  buys  2,000 
barrels  of  flour  at  $12J  per  barrel,  which  he  exports 
instead  of  the  gold.  For  the  flour  he  receives 
$14,000  in  gold,  supposing  the  English  price  to  be 
$7,  which  his  consignee  draws  from  the  Bank  of 
England.  Importing  this  coin,  he  sells  it  to  the 
speculators  for  $35,000,  thus  making  from  $10,000 
to  $15,000  clear  profit  by  the  operation.  In  the 
same  way  will  the  speculators  stimulate  the  ship 
ment  of  goods  to  every  place  where  gold  can  be  ob 
tained,  while  a  steady  stream  of  that  metal  will 
flow  into  their  coffers  from  the  vaults  of  Europe 
and  the  mines  of  California,  until  their  capital  is 
exhausted.  During  this  time  the  prices  of  all  ex 
portable  goods  would  rise  to  correspond  with  the 
speculators'  price  of  gold,  if  it  were  certain  that  the 
capital  of  the  firm  would  hold  out  until  the  gold 
could  be  got  from  Europe.  After  its  exhaustion, 
the  cause  of  the  great  rise  having  ceased,  gold  and 
every  thing  would  go  down  to  its  old  price,  and  the 
speculators  would  be  ruined,  for  no  one  would  give 
more  than  200  for  gold,  while  goods  enough  to  buy 


30  MONEY   AND   TRADE. 

$100  in  gold  in  Europe  or  California  can  be  had  for 
less  than  $200  in  currency. 

No  set  of  men  could  ever  be  guilty  of  so  mad 
an  attempt  to  injure  the  government  credit,  because 
self-interest  would  dissuade  them  from  it.  Human 
nature  is  exhibited  in  the  stock  market  just  as  it  is. 
The  buyer  of  gold,  like  all  other  buyers,  will  obtain 
what  he  wants  as  cheaply  as  he  can  get  it.  If  a 
speculator,  or  any  one  else,  gives  150  per  cent,  pre 
mium  for  gold,  it  is  only  because  no  one  in  this  or 
any  other  country  will  let  him  have  as  much  as  he 
wants  of  it  for  149.  The  case  has  been  supposed 
for  the  sake  of  illustrating  the  powerlessness  of 
individuals  to  seriously  alter  the  equilibrium  of 
values,  though  controlled  by  the  most  inexplicable 
motives. 

If  measures  as  desperate  as  these  would  be  so 
entirely  ineffectual,  still  less  so  would  be  the  common 
way  of  speculating,  wThich  amounts,  in  effect,  to 
betting  on  prices.  The  general  idea  of  this  opera 
tion  seems  to  be  that  every  one  bets  against  the  Gov 
ernment,  and  no  one  for  it ;  or,  at  least,  that  he 
who  bets  for  it  is  powerless.  But  I  trust  it  does 
not  require  any  argument  to  show  that  for  every 
bull  there  must  be  a  bear ;  that  the  bear  will  have 
as  great  an  interest  in  the  fall  as  the  bull  in  the 
rise  ;  and  that  the  bear's  exertions  to  attain  his  end 
will  be  as  powerful  and  as  effective  as  those  of  his 
opponent.  How,  then,  can  their  efforts  change  the 
price  2 


MONEY   AND   TEADE.  31 

Bull  and  bear  are  in  fact  equally  powerless  to 
effect  any  great  or  permanent  cliange  in  the  price 
of  so  universal  and  easily  transportable  an  article  as 
gold.  At  best  they  can  only  foresee  the  change. 
The  stock  market  registers  the  price  of  gold,  but 
does  not  fix  it.  It  is  governed  entirely  by  the  re 
lation  between  the  supply  and  demand.  The  supply 
and  demand  are  governed  by  public  opinion,  and  de 
pend  entirely  upon  it.  How,  it  will  not  be  difficult 
to  show : 

1.  Taking  that  portion  of  the  community  who 
have  occasion  to  buy  or  sell  gold,  whether  they  be 
speculators,   importers,   manufacturers   of  jewelry, 
bankers,  or  owners  of  gold  mines ;  if  ten  men  of 
this  class  think  -gold  is  likely  to  fall,  while  only  nine 
think  it  will  rise,  there  will  be  ten  sellers  for  nine 
buyers,    and  the    price  will   fall,   temporarily   or 
permanently. 

2.  The  influence  of  these  men  is  small  compared 
with  that  of  the  public  generally.     The  effect  of  the 
opinion  of  the  large  mass  of  the  community  may  be 
most  easily  appreciated  by  remembering  that  the 
real  value   of   gold  is  subject  to  no   appreciable 
change,  and  that  the  fluctuations  of  its  price  repre 
sent  fluctuations  in  the  value  of  legal  tender  notes, 
just  as  the  height  of  a  man  would  vary  if  measured 
by  a  rule  of  varying  length.     Suppose  now  that  an 
Ohio  farmer,  who  never  heard  of  a  stock  board  or 
the    premium    on  gold,   has  received   a  hundred 
dollars  in  notes  for  his  wheat.     He  knows  that  the 


32  MONEY   AND   TKADE. 

same  wheat  would  have  brought  him  only  forty 
dollars  in  gold.  If  he  is  disposed  to  set  a  higher 
value  on  this  money  than  his  neighbors  generally, 
he  will  be  disposed  to  sell  more  wheat,  and  to  spend 
the  least  possible  amount  of  the  money  in  buying 
goods  at  such  high  prices.  He  will  either  keep  the 
money,  or  invest  it  in  government  bonds.  The  in 
creased  amount  of  wheat  he  has  thrown  on  the  mar 
ket  will  then  cause  the  price  to  fall,  and  his  refusal 
to  buy  the  usual  amount  of  dry  goods  will  diminish 
the  demand  for  them,  both  effects  being  caused  by 
the  farmer's  increased  appreciation  of  legal  tender 
notes.  The  fall  in  wheat  will  stimulate  an  in 
creased  export  of  that  article,  while  the  diminished 
demand  for  dry  goods  will  cause  a  diminished  im 
portation.  The  importer  will  want  less  gold  for 
foreign  export,  so  that  the  price  of  gold  also  will 
fall. 

But,  suppose  the  farmer,  through  improvidence, 
or  want  of  confidence  in  the  Government,  spends  his 
money  in  fine  clothes.  He  will  then  create  a  demand 
for  five  yards  more  of  foreign  broadcloth,  without 
throwing  the  wheat  on  the  market  to  pay  for  it ; 
the  importer  will  be  found  in  the  gold  market  in 
quiring  for  $20  more  gold  than  he  would  otherwise 
want,  and  the  price  will  rise. 

Thus  the  sentiments  of  the  Ohio  farmer  are  re 
flected  in  the  gold  market.  The  influence  of  one  man 
will  of  course  be  infinitesimal,  but  the  influence 
of  millions  will  govern  it  entirely.  The  market  is  a 


MONEY   AND   TKADE.  33 

most  delicate  and  impartial  thermometer,  which 
registers  the  average  opinion  of  the  country  as  it  is 
manifested  by  men's  preferences  in  buying  and 
selling.  The  opinions  will  not  be  registered  at 
once.  They  must  first  cause  men  to  act,  to  buy  less 
or  sell  more,  and  it  may  then  be  some  time  longer 
before  the  effect  of  the  actions  will  be  felt  in  the 
gold  market,  just  as  the  sun  is  up  some  hours  before 
he  has  wanned  the  air,  and  caused  the  thermometer 
to  rise.  But  the  rise  or  fall  will  be  anticipated  by 
those  who  have  gold  to  buy  or  sell,  according  to 
their  best  judgment.  The  coming  waves  of  supply 
and  demand  will  be  looked  for  with  all  the  care  of 
men  who  know  that  their  pockets  must  pay  for  the 
smallest  mistake. 


CHAPTEE  II. 

THE   FINANCIAL   ELEMENTS   OF   MILITAEY    8TEENGTH. 

THE  illusions  of  habit  are  as  numerous  as  those 
of  the  sense.  Our  accustomed  associations  of  ideas 
may  confirm  us  in  an  erroneous  theory  as  strongly 
as  the  senses  of  the  untaught  confirm  them  in  the 
notion  that  the  earth  is  flat  and  immovable.  Men's 
erroneous  notions  respecting  the  functions  of  money 
are  for  the  most  part  purely  artificial.  "  The  true 
theory  of  money,"  says  Professor  Bowen,*  "  when 
nakedly  stated,  seems  like  a  string  of  paradoxes 
which  contradict  the  common  sense  of  mankind." 
This  string  hangs  from  another  seeming  paradox, 
that  the  less  men  have  used  or  desired  money,  the 
more  correctly  they  will  be  able  to  appreciate  its 
true  functions.  If  a  tribe  of  savages  about  to  un 
dertake  a  raid,  were  advised  to  supply  themselves 
beforehand  with  a  commodity  which  every  one  de 
sired  to  possess,  but  which  could  neither  be  made 
into  spears  nor  cooked  into  food,  they  would  con 
clude  that  the  benefits  to  be  derived  were  of  super 
natural  origin.  Their  views  of  the  natural  advan- 

*  Political  Economy,  Chap.  XVIII. 


FINANCIAL   ELEMENTS.  OF   MILITARY    STRENGTH.      35 

tages  to  be  derived  from  such  a  commodity  would 
be  nearly  correct,  not  only  as  applied  to  themselves, 
but  to  any  collection  of  people  however  numerous. 
They  would  be  unable  to  comprehend  the  tableau 
vivant  of  a  late  reviewer  who  exhibits  to  their  aston 
ished  gaze  twenty  millions  of  people,  possessed  of 
every  appliance  of  war,  and  threatened  with  de 
struction  by  their  enemies,  yet  unable  to  move  a 
finger,  turn  a  wheel,  or  fire  a  musket,  until  they  are 
set  in  motion  by  the  beneficent  invention  of  certain 
pieces  of  green  paper. 

This  inability  would  proceed  from  their  practi 
cal  good  sense.  When  we  consider  money  as  a 
source  of  power,  we  make  such  a  mistake  as  a  rail 
road  engineer  would  who  had  gradually  imbibed 
the  notion  that  it  was  the  rails  and  not  the  steam 
which  moved  his  engine,  and  that  fire  and  water 
were  mere  conveniences  for  keeping  it  in  order.  So 
long  as  he  made  the  accustomed  use  of  these  con 
veniences  no  harm  would  result  from  his  false 
theory ;  but  if,  in  an  emergency,  he  should  trust  to 
the  rails  alone  to  move  his  engine,  he  would  discov 
er  his  error. 

When  we  hear  poets  call  gold  and  iron  the 
sinews  of  war ;  reviews  tell  how  paper  money  drains 
swamps,  and  builds  roads,  ships,  and  cities;  and 
popular  orators  call  upon  the  people  to  aid  the  Gov 
ernment  by  converting  a  note  which  bears  no  in 
terest  into  a  bond  on  which  Government  has  to  pay 
interest  in  gold ;  we  can  hardly  separate  the  poetical 


36     FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH. 

from  the  prosaic,  the  ideal  from  the  real,  and  the 
figurative  from  the  literal.  Such  expressions  give 
us  no  deeper  practical  insight  into  the  true  func 
tions  <of  money,  than  figurative  statements  that  iron 
rails  drive  the  locomotive,  and  the  yard-stick  is  the 
sinew  of  commerce,  would  add  to  the  practical 
knowledge  of  an  engineer  or  a  merchant.  Quite 
harmless  as  poetic  fancies,  they  will  be  pernicious 
indeed  as  maxims  to  shape  our  policy.  Gold  is  a 
sinew  of  war  in  no  higher  sense  than  quicksilver  or 
platinum,  or  any  thing  else  for  which  we  can  obtain 
munitions  of  war.  Cannon  foundries  and  fertile 
fields,  trust  in  God,  and  a  consciousness  of  right ; 
these  are  the  real  sinews  of  war.  Without  them,  the 
gold  fields  of  California  will  be  useless ;  with  them, 
gold  will  never  be  wanted. 

But  money  has  its  uses.  In  commerce  it  is  the 
medium  of  exchange,  for  which  every  man  sells,  and 
with  which  he  buys.  Its  use  in  war  can  be  best 
seen  by  beginning  with  the  requirements  of  war  it 
self.  In  what  does  the  military  power  of  a  nation 
consist  ?  Undoubtedly  in  the  magnitude  and  cour 
age  of  its  armies,  the  efficiency  of  its  artillery,  and 
its  power  of  making  good  the  waste  of  war.  That 
nation  which  can  cast  most  shot  and  shell,  transport 
them  to  the  seat  of  war  with  the  greatest  facility, 
and  project  them  in  the  greatest  numbers,  will  pos 
sess  in  the  greatest  degree  the  material  elements  of 
military  strength.  Its  efficiency  in  these  respects 
will  depend  on  the  efficiency  of  its  mines,  its  foun- 


FINi'KCIAL    ELEMENTS   OF   MILITARY    STRENGTH.      37 

dries,  and  its  machine  shops,  its  agriculture  and  its 
manufactures  of  clothing.  This,  again,  will  depend 
on  the  number  of  men  that  can  be  spared  from  the 
pursuits  of  peace  to  dig  coal  and  iron,  cast  shell, 
make  wagons  and  clothing  in  the  mines  and  shops 
already  built,  and  to  dig  new  mines,  and  build  new 
shops.  If  it  is  stored  with  no  minerals,  the  men 
who  would  otherwise  be  engaged  in  digging  coal 
and  iron  may  be  employed  perhaps  with  equal  ad 
vantage  in  producing  food  and  clothing,  to  be  ex 
changed  for  coal  and  iron  with  other  countries; 
and  unless  it  is  capable  of  employing  its  industry 
in  this  way,  it  will  be  unable  to  wage  war.  Hence 
we  derive  the  fundamental  proposition : 

The  military  power  of  a  nation  is  measured  by 
the  amount  of  industry  which  it  can  divert  into  the 
channels  of  war. 

This  proposition  will  be  universally  admitted. 
It  is  equally  true  in  ancient  and  in  modern  times. 
The  great  point  of  difference  between  the  ancient 
and  modern  systems,  which  makes  a  budget  more 
necessary  to  the  latter  than  to  the  former  powers,  is 
simply  this :  in  ancient  times  almost  the  only  labor 
which  was  necessary  to  the  prosecution  of  war  was 
that  of  the  soldier  who  did  the  fighting ;  while  with 
us,  nearly  every  branch  of  human  industry  is  in 
some  way  made  subservient  to  the  preservation  and 
efficiency  of  the  army.  The  iron-founders,  the 
miners,  the  carpenters,  the  ship-builders,  the  chem 
ists,  the  surgeons,  are  all  called  upon  to  contribute 


38      FINANCIAL    ELEMENTS    OF    MILITARY    STRENGTH. 

their  labor,  and  indirectly  to  fight  the  iron-founders 
and  ship-bnilders  of  the  other  side.  The  success  of 
the  cause  depends  as  much  on  the  skill  displayed 
by  these  professions  as  upon  the  courage  of  the 
soldiers. 

The  question  now  is,  Does  money  increase  the 
amount  of  skill  and  labor  which  can  be  thus  turned 
into  the  channels  of  war  ?  I  answer,  ISTo  ;  although 
on  a  cursory  view  it  might  seem  that  the  question 
should  be  answered  in  the  affirmative.  It  may  be 
pronounced  impossible  for  industry  to  be  diverted 
into  the  channels  of  war  without  the  aid  of  money. 
The  manufacturers  cannot  supply  the  army  with 
clothing,  unless  they  receive  money  with  which  to 
pay  their  operatives  and  keep  their  machinery  in  re 
pair.  The  soldiers  must  be  paid,  else  their  families 
will  starve.  All  this  seems  very  reasonable ;  but 
let  us  look  at  the  question  a  little  closer. 

What  the  nation  really  wants  is  labor,  a  certain 
number  of  days'  work  from  every  inhabitant.  If 
there  were  no  money,  taxes  would  have  to  be  paid 
in  this  shape.  If  one-tenth  of  the  productive  popu 
lation  were  entirely  engaged  in  the  war,  then  the 
remaining  nine-tenths  would  have  to  be  called  upon 
for  one-tenth  of  the  product  of  their  labor.  The 
manufacturer  would  give  one-tenth  of  the  cloth  he 
made ;  this  would  be  handed  to  the  tailor,  who 
would  be  required  to  spend  one  day  in  ten  in  mak 
ing  it  into  clothes.  The  farmer  would  give  a  tithe 
of  his  harvest,  which  would  suffice  to  feed  every 


FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH.      39 

one  in  Government  employ.  By  such  a  system  of 
taxation  the  war  would  be  as  efficiently,  though 
not  so  conveniently,  supported  without  the  money 
as  with  it.  The  inconveniences  would  be  these: 
The  tax  might  not  be  entirely  equable ;  for  less 
than  one-tenth  of  some  products,  and  far  more  of 
others,  would  be  needed.  One  factory  might 
be  in  an  inconvenient  position  for  supplying  the 
army,  and  besides  have  some  other  very  profita 
ble  contract  on  hand  ;  while  another  might  be  con 
veniently  situated,  and  have  nothing  to  do  but 
supply  the  Government.  Clearly,  then,  it  will 
tend  most  to  the  public  good  if  the  latter  can  be 
employed  exclusively  upon  Government  account; 
and  nine-tenths  of  its  work  be  paid  for  by  others. 
Money  enables  this  to  be  done  in  such  a  way  that 
every  one  shall  be  taxed  equally.  Government  de 
mands  from  the  individual,.not  labor,  but  money, 
which  is  the  representative  of  labor.  With  the 
money  thus  obtained,  it  enters  the  market  and  pur 
chases  its  supplies  on  the  best  terms  that  it  can  ob 
tain. 

It  is  very  plain,  however,  that  the  Government 
cannot  obtain  any  money  by  taxes  or  loans,  unless 
the  payers  can  earn  more  than  they  need  for  their 
own  consumption ;  nor  will  there  be  any  supplies  in 
the  market  unless  more  goods  are  manufactured 
than  are  needed  by  the  country  at  large.  Let  us 
suppose  that  our  soil  were  so  poor,  our  manufactures 
so  rude,  and  our  wants  so  numerous,  that  the  entire 


40     FINANCIAL   ELEMENTS    OF   MILITARY    STRENGTH. 

products  of  our  industry  are  required  to  supply 
those  wants.  Our  farmers  can  only  raise  food 
enough  to  feed  us,  the  factories  can  only  make 
cloth  enough  to  clothe  us,  and  we  have  no  idle 
population  to  devote  to  the  manufacture  of  war 
materials.  In  such  a  case,  no  amount  of  money, 
paper  or  metallic,  would  enable  us  to  wage  war. 
We  could  not  spare  a  farmer  to  take  the  field,  be 
cause  his  fellow  farmers  could  not  then  raise  food  to 
subsist  themselves  and  him  too  ;  we  could  not  spare  a 
manufacturer  to  cast  shot,  or  build  a  powder  mill, 
because  the  manufacturers  who  are  left  could  not 
then  make  the  necessary  amount  of  clothes.  The 
Government  could  buy  nothing,  because  there  would 
be  nothing  to  buy,  though  it  possessed  the  silver 
mines  of  Peru. 

It  may  be  replied,  that  in  such  a  case  the  offer 
.of  articles  which  men  ^  desire  so  strongly  as  silver 
and  gold,  would  stimulate  them  to  extraordinary 
efforts  in  the  production  and  manufacture  of  war 
material,  and  to  extraordinary  self-denial  in  the 
consumption  of  food  and  clothing.  Yery  true ;  but 
it  would  only  increase  their  willingness,  not  their 
ability,  to  work  extra  hours,  and  stint  themselves  in 
the  enjoyment  of  the  necessaries  of  life.  The  will 
ingness  is  indeed  as  important  to  the  Government 
as  the  ability,  but  we  are  at  present  considering  the 
power  which  a  nation  can  exert,  not  what  it  will 
exert.  Besides,  even  the  increased  willingness  de 
pends  on  the  supposition  that  the  Government  has 


FINANCIAL   ELEMENTS    OF   MILITARY    STRENGTH.      41 

obtained  possession  of  the  precious  metals  without 
taxing  the  people,  which  is  a  case  that  does  not 
often  occur  in  practice.  It  seems,  then,  that  the 
amount  of  industry  which  a  people  *can  divert  into 
the  channels  of  war  is  not  increased  by  the  possession 
of  any  sort  of  money.  The  latter  only  facilitates 
the  diversion  ~by  making  it  easier  to  measure  each 
man's  share  of  the  public  burden. 

An  attempt,  on  the  part  of  a  community,  to 
make  military  efforts  beyond  its  strength,  is  produc 
tive  of  certain  well-defined  effects  which  we  shall 
proceed  to  show. 

The  Government  levies  taxes,  and  raises  loans  in 
gold,  with  which  it  hopes  to  purchase  supplies  for 
its  armies.  It  purchases  from  a  manufacturer 
clothing  which  the  latter  would  otherwise  exchange 
for  bread.  In  lieu  of  the  clothing  he  must  now 
offer  gold  for  his  bread.  It  also  purchases  from  the 
farmer  corn  which  he  would  otherwise  exchange  for 
clothing,  so  that  the  farmer  must  now  offer  gold  for 
his  clothing  instead  of  corn.  Clothing,  bread,  and 
every  thing  else  required  for  the  army,  will,  in  conse 
quence,  become  scarce  and  dear ;  and  gold  will  be 
exported  by  the  people  to  supply  the  want.  Then 
comes  general  distress  among  the  poorer  classes,  and 
general  scarcity  of  money. 

If,  now,  the  Government  attempts  to  remedy  the 
scarcity  of  money  by  prohibiting  the  export  of 
specie  and  by  issuing  paper  money,  the  consequence 
will  be  a  universal  rise  in  the  prices  of  the  neces- 


4:2      FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH. 

saries  required  by  the  people  and  the  army,  so  that 
neither  the  distress  nor  the  scarcity  will  be  mitigat 
ed  in  any  degree.  If  the  paper  money  is  redeema 
ble  in  coin  on  demand,  the  rise  will  not  be  so  rapid  as 
if  it  is  not  so  redeemable.  In  the  latter  case,  it  will 
speedily  lose  all  purchasing  power,  no  matter  how 
secure  may  be  its  ultimate  redemption;  for  the 
simple  reason  that  people  cannot  afford  to  part  with 
the  fruits  of  labor  for  any  thing  but  necessaries. 

Thus,  the  inevitable  effect  of  the  attempt  allud 
ed  to  will  be  universal  distress  among  the  poorer 
classes,  accompanied  either  by  enormous  prices  or 
great  scarcity  of  money,  according  as  the  policy  of 
the  Government  has  or  has  not  tended  to  expand  the 
currency.  The  distress,  and  the  difficulty  of  pro 
curing  supplies,  will,  for  the  time  being,  be  entirely 
independent  of  the  financial  policy  of  the  govern 
ment,  following  equally  whether  the  war  be  carried 
on  with  paper  or  with  gold,  by  loans  or  by  taxa 
tion.  We  have  seen  them  in  France  in  the  time  of 
the  revolution  ;  in  England  during  the  Napoleonic 
wars ;  and  we  see  them  in  the  rebel  states  now. 
They  are  the  true  and  only  indications  that  the 
resources  of  the  country  are  taxed  to  the  utmost. 

It  might  have  been  possible  to  make  the  love  of 
gold  the  means  of  demoralizing,  and  finally  destroy 
ing,  the  Southern  Confederacy.  If,  during  the  war, 
we  had  allowed  the  rebels  to  export  what  they 
pleased,  without  restriction,  receiving  in  exchange 
therefor  nothing  but  gold,  what  would  have  been 


FINANCIAL    ELEMENTS   OF   MILITARY    STRENGTH.      4:3 

the  consequence  ?  Individuals,  instead  of  devoting 
themselves  to  the  poorly  paid  task  of  supplying  the 
rebel  government,  would  have  exerted  all  their 
energies  in  raising  cotton,  to  export  for  gold.  The 
possession  of  this  metal  would  have  been  a  source 
of  great  gratification  to  the  individual  owners,  but 
^would  have  added  nothing  to  the  military  strength 
of  the  rebel  government.  The  policy  would,  there 
fore,  have  acted  as  a  bribe  to  devote  their  energies  to 
other  purposes  than  the  prosecution  of  war.  The 
only  objection  to  it  would  be  that  much  of  the  gold 
would  have  fallen  into  the  hands  of  the  rebel 
government,  and  been  employed  in  fitting  out  pri 
vateers  in  foreign  countries. 

We  have  now  arrived  at  a  standpoint  where  we 
can  clearly  see  what  the  measure  of  military  power 
really  is.  It  depends  upon,  and  is  measured  by  the 
excess  of  what  the  nation  is  able  to  produce  over 
and  above  what  is  necessary  for  its  subsistence.  If 
all  our  labor  is  exhausted  in  the  production  of  food, 
clothing,  and  other  necessaries,  we  cannot  make  war 
at  all,  as  we  have  already  seen.  If  half  our  labor  is 
sufficient  for  this  purpose ;  if  one-half  our  productive 
population  can,  by  their  industry,  supply  the  whole ; 
we  can  then  employ  the  entire  energies  of  the  other 
half  in  war.  On  an  average  every  man  can  spend 
half  his  time  either  in  fighting  or  making  things  to 
fight  with. 

But  we  make  a  great  mistake  when,  as  is  often 
done,  we  estimate  this-  excess  of  production  over 


44     FINANCIAL    ELEMENTS    OF   MILITARY    STRENFTH. 

consumption  by  its  actual  amount  in  time  of  peace. 
This  only  shows  what  we  can  spend  in  war  without 
working  any  harder  than  usual,  and  without  de 
priving  ourselves  of  any  enjoyment  that  costs  money 
or  labor.  But  there  is  generally  a  large,  partially 
idle  population  which  can.  be  employed  in  case  of 
an  emergency;  men  can  work  more  industriously, 
and  they  can  greatly  curtail  their  expenditures. 

All  we  have  said  of  the  source  of  military 
strength  may  be  concentrated  into  one  word, 
Frugality.  It  is  the  frugal  man  who  consumes  less 
than  he  produces  ;  and  as  the  nation  is  made  up  of 
individuals,  it  is  the  frugal  nation  which  can  turn 
its  energies  to  war,  and  at  the  same  time  supply  its 
own  wants.  It  is  the  frugal  nation  which  in  time 
of  peace  will  be  prepared  for  war.  On  the  other 
hand,  the  man  who  consumes  all  that  he  produces 
will  never  have  any  thing  to  sell  the  Government,  no 
matter  how  much  money  the  Government  may  have 
to  pay  with ;  and  a  nation  composed  entirely  of  such 
individuals  will  not  only  be  unprepared  for  war,  but 
will  have  to  change  its  habits  before  it  can  prepare. 

Thus  the  trite  maxim,  which  men  are  generally 
so  much  more  ready  to  apply  to  others  than  to 
themselves,  namely,  that  one's  wealth  is  measured 
by  the  simplicity  of  his  wants  as  much  as  by  the 
amount  of  his  income  is  the  expression  of  a  great  and 
important  political  truth.  A  nation  may  be  saved 
or  destroyed  according  as  its  people  are  willing  or 
unwilling  to  dispense  with  costly  luxuries. 


FINANCIAL    ELEMENTS   OF   MILITARY   STRENGTH.      45 

That  the  labor  of  engines,  as  well  as  of  men,  is 
to  be  included  in  the  war  power ;  that  foundries, 
mines,  and  machine  shops  all  add  to  military 
strength ;  that  the  nation  which  already  possesses 
cannon,  means  of  transportation,  and  military  stores 
in  quantities  sufficient  for  the  war,  will  have  a  great 
advantage  over  one  which  has  yet  to  cast  its  cannon 
and  build  its  wagons  ;  all  this  is  too  evident  to  re- 

O  ' 

quire  further  elucidation.  Wealth  in  all  these  forms 
is  power.  But  there  other  phases  of  the  problem 
which  are  very  difficult.  Wealth  is  not  always  pow 
er  ;  in  some  respects  it  may  be  absolute  weakness. 
There  are,  in  fact,  two  entirely  different  points  of  view 
from  which  the  science  of  the  accumulation  of  wealth 
may  be  approached ;  and  according  as  we  take  one 
view  or  another  of  the  objects  of  human  industry  we 
shall  be  led  to  different  answers  to  the  question, 
What  ought  a  nation  to  do  with  its  money  ? 

Political  economy,  as  an  abstract  science,  con 
siders  every  thing  as  wealth  which  men  desire,  and 
which  they  can  obtain  by  labor,  and  in  no  other 
way.  It  does  not  discuss  the  ethical  question 
whether  men  ought  to  desire  it ;  the  bare  fact  that 
men  do  desire  it,  and  are  willing  to  labor  in 
order  to  enjoy  it,  is  all  that  concerns  it.  The  value 
of  any  article  of  wealth  is  measured  by  the  least 
amount  of  labor  adequate  to  its  possession  by  the 
individual  who  desires  it.  If  a  laborer  is  willing  to 
work  all  day  for  a  quart  of  whiskey  to  get  drunk 
upon,  political  economy  does  not  question  his  wis- 


46     FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH. 

dom ;  it  argues  that  the  quart  of  whiskey  must  afford 
him  more  enjoyment  than  any  thing  else  he  could 
obtain  at  the  same  price,  else  he  would  have  bought 
something  else.  Any  law  or  regulation  which 
forces  him  to  buy  any  thing  else  detracts  from  his 
welfare,  which  is  looked  upon  as  one  and  the  s  ame 
thing  with  the  utmost  gratification  of  his  wishes. 

If  all  men  really  desired  their  highest  good  at 
all  times,  no  fault  could  be  found  with  any  of  the 
conclusions  of  this  pure  science.  But  such  is  not 
the  case;  and  it  is  the  part  of  statesmanship  to 
encourage  those  desires  which  really  tend  to  good, 
and  to  discourage  those  which  tend  toward  evil. 
When  it  is  once  concluded  what  desires  are  good, 
and  what  are  evil,  political  economy  steps  in  as  a 
concrete  science,  and  shows  how  the  good  may  be 
encouraged,  and  the  evil  discouraged.  The  question 
to  be  solved  then  is,  how  must  our  labor  be  employ 
ed  to  promote  our  welfare  in  the  greatest  degree  ? 

In  the  present  chapter  we  are  entirely  employed 
with  this  question.  The  national  good  which  we 
are  supposed  to  be  seeking  is  neither  wealth  nor  the 
utmost  gratification  of  our  desires,  but  military 
power.  It  may,  indeed,  be  considered  as  an  appli 
cation  of  the  principles  of  political  economy  to  the 
case  of  a  nation  whose  great  desire  is  to  attain  the 
largest  measure  of  military  strength.  A  discussion 
of  the  entire  subject  might  fill  a  volume ;  we  are  at 
present  trying  to  discover  what  financial  condition 
is  most  conducive  to  this  end.  Particularly  are  we 


FINANCIAL   ELEMENTS   OF   MILITARY    STKENGTH.     47 

seeking  to  discover  the  functions  of  the  precious 
metals  in  enabling  a  nation  to  cany  on  war.  It 
has,  I  hope,  been  made  sufficiently  plain  that  the 
possession  of  gold  adds  no  more  to  the  internal 
power  of  a  nation,  no  matter  how  large,  than  a  sil 
ver  mine  would  have  added  to  the  resources  of 
Robinson  Crusoe.  The  sole  office  of  money  is  to 
equalize  the  burden  of  war  among  the  individual  cit 
izens  ;  and  this  can  be  done  as  effectually  by  a  correct 
system  of  paper  money  as  by  exchanges  of  gold. 
But,  every  gold  dollar  is  the  embodiment  and  ex 
pression  of  a  certain  amount  of  war  material  which 
the  possessor  can  command  in  foreign  countries. 
To  command  the  material  it  is  necessary  to  export 
the  dollar.  The  latter  has,  then,  disappeared ;  in 
its  place  has  appeared  a  musket,  or  a  box  of  percus 
sion  caps.  It  is  certain,  then,  that,  other  conditions 
being  equal,  the  nation  which  has  the  most  gold  can 
make  the  greatest  military  efforts,  because  a  people 
can  always  export  readily  their  entire  stock  of  gold 
without  serious  detriment  to  their  business,  or  their 
enjoyment.  This  metal  is  thus  a  reservoir  of  power. 
But  a  collection  of  any  other  sort  of  property, 
equally  desired  by  mankind  at  large,  and  equally 
transportable,  would  be  equally  a  reservoir  of 
power.  The  only  reasons  why  quicksilver  or  plati 
num  would  not  be  as  good  as  gold,  are,  in  the  first 
place,  that  equal  values  of  them  cannot  be  trans 
ported  so  easily;  and  in  the  next  place,  that  the 
demand  for  them  is  so"  far  from  universal  that  their 


48      FINANCIAL    ELEMENTS    OF   MILITAKY    STRENGTH. 

value  would  be  diminished  by  throwing  any  consid 
erable  amount  on  the  market  at  once.  It  is  prob 
able  that  fifty  millions  of  dollars'  worth  of  gold  would 
find  a  more  ready  market  in  any  European  country 
than  ten  millions'  worth  of  any  other  article. 

Is  it,  then,  desirable  to  encourage  the  accumula 
tion  of  the  precious  metals  in  time  of  prosperity,  in 
order  that  we  may  have  them  to  fall  back  upon  in 
time  of  adversity  ?  It  is  impossible  to  answer  this 
question  absolutely,  because  it  depends  on  the 
habits,  dispositions,  and  circumstances  of  the  na 
tion.  But  wre  can  easily  lay  out  the  foundation 
on  which  it  depends.  It  must  be  remembered  that 
there  is  one  objection,  and  only  one,  to  such  accu 
mulation  ;  the  loss  of  interest  on  the  capital  thus 
accumulated.  Gold  and  silver  coin  is,  in  the 
strictest  sense,  unproductive  capital,  whether  lying 
in  the  vaults  of  banks,  or  locked  up  in  a  miser's 
chest,  or  circulating  as  money.  Every  man  who 
has  it  in  his  possession  loses  the  interest  during  the 
time  it  remains  so,  as  will  be  quite  clear  on  re 
flecting  that  no  one  would  pay  interest  on  gold  to 
~keep,  but  only  to  exchange  as  soon  as  possible  for 
something  else.  Hence,  the  use  of  the  precious 
metals  as  the  principal  currency  of  a  nation,  is  dep 
recated  by  political  economists.  But,  it  must  be 
remembered  that  the  community,  in  precisely  the 
same  way,  loses  the  interest  on  all  the  products  of 
its  labor  while  they  are  waiting  to  be  consumed. 
The  goods  kept  for  sale  represent  so  much  idle  capital, 


FINANCIAL   ELEMENTS    OF   MILITARY    STRENGTH.      49 

in  the  same  way,  and  to  the  same  extent,  as  does  the 
gold  kept  in  the  vaults  of  a  bank.  If  it  is,  on  the 
average,  a  year  from  the  time  that  a  piece  of  cloth 
is  manufactured  until  it  finally  reaches  the  person 
who  is  to  wear  it  in  the  form  of  a  coat,  the  last 
seller  must  add  one  year's  interest  to  the  price. 
If  a  merchant,  on  the  average,  holds  his  stock  of 
goods  a  year  before  finding  a  purchaser,  he  must,  in 
addition  to  every  thing  else,  add  a  year's  interest 
to  the  price.  If  cloth,  like  gold,  was  all  of 
one  kind  and  quality,  a  kind  of  cloth  banking 
would  be  speedily  introduced.  In  the  cloth  bank 
both  the  manufacturers  and  tailors  of  an  entire 
city  could  deposit  their  goods  free  of  expense, 
exactly  as  they  deposit  money  in  a  bank,  and 
receive  a  certificate  that  A,  B,  or  bearer,  is  en 
titled  to yards  of  cloth  at  the  Clothiers'  Bank. 

The  bank,  thus  holding  permanently  the  entire  stock 
in  trade  of  all  the  tailors  of  a  city,  could  safely  sell 
three-fourths,  or  even  nine-tenths  of  it,  and  invest 
the  money  in  dividend-paying  securities.  The  re 
mainder  would  be  kept  as  a  reserve,  like  the  specie 
reserve  of  a  money  bank.  As  fast  as  one  man  sent 
in  checks  for  his  cloth,  another  would  come  in  with 
a  new  deposit ;  and  if,  on  any  extraordinary  occa 
sion,  the  drafts  should  exceed  the  new  deposits  by 
an  amount  greater  than  the  cloth  reserve,  the  secu 
rities  could  be  changed  back  for  cloth  without  seri 
ous  loss. 

In  the  same  way,  if  a  nation  during  peace  manu- 
3 


50     FINANCIAL   ELEMENTS   OF  MILITAEY   STRENGTH. 

factures  arms  and  munitions  of  war,  to  be  kept  for 
use  in  case  of  hostilities,  it  loses  the  interest  on  all 
the  money  thus  spent  during  the  time  that  the  arms 
are  waiting  to  be  used,  with  the  additional  disadvan 
tage  that  they  may  be  superseded  by  some  improved 
weapon.  Indeed,  every  thing  which  enables  the 
business  of  the  nation  to  be  carried  on,  and  its 
strength  to  be  kept  intact  with  a  diminished  amount 
of  circulating  capital,  whether  in  the  form  of  gold 
kept  in  reserve,  food  waiting  to  be  eaten,  goods 
waiting  to  be  sold,  or  arms  waiting  to  be  used,  saves 
the  amount  of  that  diminution  to  the  nation,  and  en 
ables  it  to  enjoy,  to  an  additional  extent,  the  fruits  of 
its  labor.  Thus,  from  a  politico-economic  point  of 
view,  every  contrivance  which  enables  men  to  live 
"  from  hand  to  mouth  "  increases  their  wealth.  The 
paradoxical  character  of  this  view  will  disappear  on 
applying  the  principle  to  the  case  of  an  individual. 
If  a  householder  is  obliged,  from  any  cause,  to  keep 
on  hand  continually  ten  barrels  of  flour  for  the  use 
of  his  family,  the  removal  of  this  cause  will  enable 
him  to  get  along  with  only  one  barrel  of  flour  at  a 
time,  and  will  set  free,  for  other  uses,  the  money  for 
merly  invested  in  nine  barrels  of  flour. 

But  it  is  clear  that  all  this  utilizing  of  capital, 
while  it  adds  to  the  enjoyment  of  the  community, 
detracts  from  its  power  to  meet  a  sudden  emergency. 
Where  the  amount  of  idle  capital  is  reduced  to  its 
minimum,  there  will  be  less  coin  to  place  at  the 
disposal  of  the  Government ;  less  cloth  to  clothe  an 


FINANCIAL  ELEMENTS    OF   MILITARY    STRENGTH.       51 

army ;  less  flour  to  feed  it ;  fewer  muskets  to  arm  it. 
But  these  evils  will  not  be  serious,  if  the  utilized 
capital  has  been  invested  in  such  a  form  that  it  can 
be  rapidly  transformed  into  the  required  food,  cloth 
ing,  and  arms.  The  whole  problem,  then,  depends 
on  this  question :  What  will  fie  done  with  the  capi 
tal  set  free  in  the  ways  suggested  f  If  we  do  not  al 
low  gold  to  accumulate,  what  will  we  accumulate 
in  place  of  it  f  A  representative  case  is  that  of  the 
man  who  has  been  keeping  ten  barrels  of  flour  on 
hand.  Whether  he  sell  nine  of  his  barrels  at  once, 
or  save  the  money  he  would  otherwise  have  spent 
in  flour,  until  the  nine  barrels  are  eaten  up,  he  will 
have  the  price  of  nine  barrels,  say  $50,  to  dispose 
of.  If,  now,  he  is  going  to  spend  this  money  in 
building  a  cannon  foundry,  or  digging  a  mine,  the 
transformation  will  increase  the  military  power  of 
the  community,  and  ought  therefore  to  be  encour 
aged.  But  if  he  spend  it  in  giving  a  feast  to  his 
friends,  it  will  all  have  disappeared  next  day,  and 
the  country  will  be  less  able  to  feed  an  army,  owing 
to  the  disappearance  of  the  nine  barrels  of  flour. 

The  same  principle  is  illustrated  in  the  case  of 
the  precious  metals.  To  the  question :  Ought  we  to 
keep  the  gold  in  the  country  or  export  it  ?  the  only 
philosophical  answer  is :  that  depends  altogether  on 
what  you  get  in  exchange  for  it.  If  you  get  some 
thing  which  is  of  special  importance— if  in  time  of 
war  you  get  arms  and  ammunition,  or,  in  time  of 
peace,  get  things  which  will  be  sources  of  wealth 


52      FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH. 

and  power  in  the  future,  then  by  all  means  export 
it.  But,  if  you  are  to  receive  only  articles  of  lux 
ury,  which  will  be  consumed  without  adding  to 
your  real  welfare,  then  keep  it  at  home.  The  stock 
of  gold  is  like  a  cistern  of  water  kept  by  a  family 
against  a  time  of  drought.  If  this  emergency  is 
never  to  come,  it  is  foolish  to  save  the  water.  If  it 
does  come,  it  will  defeat  the  purpose  of  saving  the 
water  to  say  that  the  family  must  still  avoid  drink 
ing  it.  But  we  must  distinguish  between  its  legiti 
mate  use  and  its  use  by  the  children  to  drive  a  toy 
water-wheel. 

We,  therefore,  conclude  that  it  is  more  conducive 
to  power  to  hoard  our  wealth  than  to  consume  it ; 
and  better  still  to  place  it  in  such  a  form  that  it  may 
help  to  create  more  wealth.  In  more  ways  than  one 
is  frugality  at  the  bottom  of  national  as  well  as  indi 
vidual  prosperity.  It  may  not  at  first  sight  appear 
that  he  who  loans  his  money  to  a  manufacturer  adds 
any  more  to  the  national  wealth  than  if  he  spent  it 
in  wine  and  cigars  ;  but  in  the  former  case  he  per 
haps  enables  a  manufacturer  to  enlarge  his  build 
ings  and  add  a  new  engine  to  his  works.  He  is 
really  the  owner  of  the  additional  power,  which  the 
manufacturer  himself  only  uses.  The  latter  holds 
himself  in  readiness  to  resign  either  this  or  its  equiv 
alent  in  money  when  the  debt  is  demanded.  When 
the  Government  is  in  need  of  military  power  the 
creditor  can  assign  to  it  his  debt,  or,  in  other  words, 
the  right  to  use  the  factory  power  without  any  shock 


FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH.       53 

to  his  own  business,  and  without  giving  his  debtor 
any  just  cause  of  complaint.  The  Government  then 
has  command,  for  war  purposes,  of  enginery  which 
would  not  have  been  in  existence  but  for  the  fact 
that  the  owner  of  the  spare  money  preferred  a  fu* 
ture  to  a  present  good.  It  follows  that  the  habit  of 
frugality  is  as  necessary  in  preparing  for  war  as  in 
carrying  it  on.  It  is  the  bounden  duty  of  every 
government  which  seeks  the  happiness  of  posterity, 
to  encourage  frugality  by  giving  all  possible  security 
to  the  savings  of  the  poor.  Who  can  measure  the 
total  additions  to  our  war  resources  made  by  the 
savings  banks  of  Massachusetts  ? 

Thus,  in  whatever  way  we  approach  the  subject, 
we  are  led  to  the  strictly  logical  conclusion  that  the 
great  and  permanent  elements  of  real  power  are  to 
be  found  in  the  characters  of  the  people,  and  not  in 
the  iron  and  gold  they  may  possess.  History  teems 
with  illustrations  of  the  truth  of  this  conclusion. 
How  did  Tyre,  and  Phoenicia,  and  Athens  make 
themselves  felt  over  a  large  part  of  the  known 
world  ?  How  did  the  little  republic  of  Venice  re 
sist  the  armies  of  Continental  Europe?  How  did 
the  Dutch  Republic  foil  the  mighty  efforts  of  Louis 
XIV.  to  compass  its  destruction,  and  at  the  same 
time  contest  the  supremacy  of  the  ocean  with  the 
combined  fleets  of  France  and  England  ?  By  their 
mines  of  iron  and  gold,  their  fertile  fields,  or  their 
internal  financial  system  ?  It  cannot  be,  for  in  all 
these  respects  their  neighbors  had  the  advantage. 


54      FINANCIAL   ELEMENTS   OF   MILITARY    STEENGTH. 

By  what  means  have  the  inhabitants  of  the  British 
isles  been  enabled  to  found  an  empire  which  encir 
cles  the  globe  ?  Is  there  any  thing  in  the  situation 
or  resources  of  those  little  islands,  not  so  large  as 
New  England,  which  has  given  them  this  enormous 
power  ?  In  fine,  how  is  it  that  small  nations  have 
so  often  become  great  maritime  powers,  and  that 
once  become  so,  they  have  exerted  so  great  an  in 
fluence  over  the  destiny  of  the  human  race  ?  Since 
these  effects  are  not  due  to  the  advantages  of  the 
position  in  which  nature  placed  them,  they  must  be 
due  to  the  characteristics  of  the  people  themselves. 

The  fundamental  cause  of  all  this  greatness  is  a 
disposition  to  labor  for  a  higher  good  than  present 
gratification.  A  luxurious  people,  not  desirous  to 
leave  their  country  or  the  world  any  better  than 
they  found  it,  would  never  subject  themselves  to  the 
privations  and  hardships  of  long  sea  voyages.  We 
have  shown  that  the  desire  of  a  higher  good  than 
present  gratification,  and  the  disposition  to  labor  for 
that  end,  are  the  foundations  of  all  military  power ; 
and  thus  it  is  that  such  people  as  we  have  alluded 
to  have  always  been  powerful. 

Again,  to  launch  a  ship  on  the  seemingly  illim 
itable  ocean  and  trust  for  success  to  the  fitful  action 
of  the  elements,  requires  both  courage  and  skill. 
Without  confident  courage,  the  feat  would  never  be 
attempted ;  without  skill,  it  would  result  in  the  de 
struction  of  the  adventurer. 

The  world  seems  designed  to  encourage  and  fos- 


FINANCIAL   ELEMENTS   OF   MILITARY    STRENGTH.       55 

ter  these  higher  qualities  of  the  human  mind  by  fur 
nishing  all  men  with  the  means  of  using  them. 
Brains  have  always  in  the  end  triumphed  over  brute 
force,  however  fiercely  the  latter  may  have  main 
tained  the  contest.  The  inflexible  will  is  stronger 
than  brass,  and  genius  better  than  gold.  Farragut 
and  Bailey  have  shown  that  iron  hearts  within  make 
the  best  plating  for  a  ship  of  war.  Genius,  cour 
age,  honesty — above  all,  self-denial — these,  and  these 
alone,  mould  the  institutions  of  posterity. 

Necessarily  following,  from  the  notion  that  mon 
ey  is  a  sinew  of  war,  is  another:  that  a  nation 
which  has  reached  the  point  of  financial  exhaustion 
will  have  to  stop  fighting.  The  example  of  the  re 
bellious  States  ought  to  have  dispelled  this  illusion ; 
for  they  had  scarcely  any  financial  resources  wrorthy 
the  name  to  start  with,  and  what  they  had  were  ex 
hausted  in  the  beginning.  Nevertheless  we  still 
find  one  set  of  men  counting  up  the  enormous  sums 
of  money  we  are  spending,  and  another  the  enor 
mous  sums  which  our  resources  will  enable  us  to 
pay.  ""We  have  spent  $3,000,000,000  in  this  war," 
say  the  former.  Admit  that  we  have,  where,  let  me 
ask,  has  this  $3,000,000,000  come  from  ?  And  where 
has  it  gone  to  ?  We  only  had  from  $250,000,000  to 
$300,000,000  of  coin  in  the  beginning,  and  the 
chances  are  that  we  have  three-fourths  of  that 
amount  still.  Have  our  farmers  curtailed  their 
crops  ?  Have  they  got  fewer  ploughs,  horses,  barns, 
or  wagons  than  in  the  beginning  \  Are  their  facilities 


56      FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH. 

for  raising  horses  and  the  means  of  our  mechanics  to 
build  barns  and  make  ploughs  lessened  ?  Have  our 
factories  been  suffered  to  disappear,  our  engines  to 
wear  out,  or  our  mines  to  fill  up  ?  I  trow  not.  I 
think  we  possess  as  much  material  wealth  as  at  the 
beginning  of  the  war,  and  perhaps  much  more.  Oiir 
unworthy  financial  policy  has  indeed  caused  large 
sums  to  change  hands  unjustly,  and  caused  us 
to  lose  largely  in  that  moral  wealth  which  is  so 
much  better  than  material  wealth,  but  of  this  here 
after.  "We  at  present  want  to  know  what  is  meant 
by  saying  that  we  have  spent  $3,000,000,000,  when 
we  are  as  rich  as  ever.  Plainly  it  means  neither 
more  nor  less  than  this,  that  the  people  of  the  loyal 
States  have  done  $3,000,000,000  worth  of  work  in 
carrying  on  the  war.  They  have  ploughed  and  reap 
ed,  and  cast  cannon,  and  rolled  iron  plates  to  this 
amount.  If  one  day's  work  is  worth  on  the  average 
$3,  then  each  man  has  done  on  the  average  one  hun 
dred  days'  work  to  transmit  social  liberty  to  his  pos 
terity.  Is  the  expenditure  of  this  labor  to  be  re 
gretted  to  the  same  extent  that  we  would  regret  the 
loss  of  an  equivalent  of  wealth  ?  The  answer  to 
this  question  is  very  much  a  matter  of  taste.  From 
a  strictly  economic  point  of  view  we  should  be  com 
pelled  to  answer  in  the  affirmative.  But  it  by  no 
means  follows  that  we  are  any  poorer  than  if  the 
war  had  not  occurred.  Does  any  one  suppose  that 
all  the  labor  we  have  spent  in  this  way  would  have 
been  spent  in  adding  to  our  wealth  if  the  war  had 


FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH.       57 

not  occurred?  Assuredly  not.  One-half  would 
have  been  dedicated  to  idleness,  or  the  gratification 
of  the  moment,  and  perhaps  half  the  remainder  to 
objects  which  every  one  would  admit  to  add  little  or 
nothing  to  our  highest  good. 

The  point  in  question,  as  well  as  the  difference 
between  the  highest  good  and  the  good  of  the  polit 
ical  economist,  may  be  illustrated  by  a  single  in 
stance.  An  individual  of  dramatic  tastes  would 
spend  $1  in  money  and  three  hours  of  time  in  see 
ing  a  play.  The  gratification  he  is  to  derive  from 
this  source  must  compensate  him  for  his  time  and 
money,  else  he  would  not  spend  them  in  this  way. 
But  Government  steps  in  with  a  tax,  and  compels 
him  to  give  up  his  surplus  dollar  for  the  public  good, 
and  requires  him  to  spend  his  three  spare  hours  in 
making  cartridges.  Next  day  the  Government  is 
more  powerful  by  one  box  of  cartridges,  worth  per 
haps  $1,  and  $1  worth  of  munitions  of  war,  while 
the  individual  who  made  the  contribution  is  as 
wealthy  as  if  it  had  not  been  required  of  him.  As 
far  as  we  may  say  that  this  diversion  of  labor  and 
money  is  to  be  deplored,  just  so  far  may  we  deplore 
the  expenses  of  war.  As  far  as  we  can  call  it  spend 
ing  $2,  so  far  may  we  say  we  have  spent  $3,000,000,- 
000  in  carrying  on  the  present  war. 

The  question  we  ought  ask  is  not  whether  what 
we  have  gained  by  the  war  is  worth  so  many  dol 
lars,  but  whether  it  is  worth  a  year's  work  from 
every  able-bodied  man  in  the  country. 
3* 


58      FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH. 

But  for  our  unsound  financial  system  we  might 
be  able  to  continue  the  war  for  generations  without 
seriously  crippling  our  powers.  We  could  not,  in 
deed,  enjoy  quite  so  many  luxuries ;  we  could  not 
develop  our  resources  so  rapidly ;  the  digging  of  our 
mines  and  the  clearing  of  our  forests  would  be  im 
peded  ;  but  we  should  enjoy  more  luxuries  than  our 
ancestors  even  a  half  century  back  could  enjoy  in 
time  of  peace.  In  one  respect,  indeed,  we  could 
not  continue  the  war  on  its  present  scale ;  it  is  not 
likely  that  we  should  be  able  to  keep  half  a  million 
of  effective  soldiers  in  the  field  fighting  such  battles 
as  have  hitherto  characterized  the  war.  In  all  other 
ways  we  can  continue  our  present  exertions  indefi 
nitely. 

The  Southern  States  furnish  an  example  of  a 
people  who,  while  commanding  few  of  the  elements 
of  military  power  we  have  described,  were  never 
theless  able  to  turn  those  few  into  the  channels  of 
war  with  great  ease.  They  consumed  nearly  all 
they  produced,  but  they  spent  much  more  in  the 
luxuries  of  life  than  in  its  necessaries.  Subsisting  on 
the  coarsest  and  cheapest  food,  such  as  a  Lowell  op 
erative  would  have  starved  upon,  the  greater  part 
of  their  wealth  was  devoted  to  the  social  circle,  the 
chase,  the  turf,  and  the  tournament.  All  these  ex 
penses  are  easily  dispensed  with,  and  the  wealth  di 
verted  into  other  channels.  It  needs  only  the  gen 
eral  acquiescence  of  the  community  to  enable  every 
one  to  reduce  his  social  wants,  including  the  luxu- 


FINANCIAL    ELEMENTS    OF   MILITARY    STRENGTH.       59 

ries  of  dress,  to  a  minimum,  and  this  acquiescence 
was  granted  by  Southern  society  at  an  early  period, 
while  we  are  nearly  as  luxurious  as  ever.  The  ex 
citements  of  war  furnish  a  very  good  substitute  for 
the  great  amusements  of  the  Southron,  but  are  ill- 
adapted  to  the  more  refined  and  intellectual  taste  of 
the  North.  Thus  the  transition  from  peace  to  war 
was  accompanied  with  a  far  greater  shock  to  the 
North  than  to  the  South. 

Let  us  recapitulate  some  of  the  conclusions  of 
this  chapter. 

Neither  metallic  nor  paper  money  adds  any 
thing  to  the  internal  power  of  a  people. 

But  gold  is  a  source  of  power  which  can  be 
commanded  by  exporting  the  gold. 

It  is  more  conducive  to  military  strength  to  put 
our  wealth  in  the  form  of  gold  laid  up  against  an 
emergency  than  to  consume  it. 

But  it  is  still  better  to  put  our  wealth  into  such 
a  form  that  it  shall  be  productive  of  more  wealth ; 
for  example,  to  employ  it  in  building  mills  and  dig 
ging  mines.  Such  employment  of  our  surplus 
means  is  in  the  greatest  possible  degree  conducive 
to  national  strength. 


CHAPTER  III. 

OUK   DEBT   AND    OUR   TAXES. 

IN  the  last  chapter  we  considered  the  nation  as,  in 
the  fullest  sense  of  the  term,  a  commonwealth.  We 
considered  the  strength  of  the  nation  as  the  aggre 
gate  strength  of  the  citizens  composing  it.  We 
measured  what  individuals  could  do  to  promote  the 
public  welfare,  not  what  Government  might  require 
of  them.  If  the  public  good  were  the  first  and 
greatest  object  of  every  man's  desire  ;  if  we  could 
rely  upon  every  man  to  promote  that  good  to  the  ut 
most  extent  of  his  power,  without  cavilling  about 
his  just  share,  the  question  of  ways  and  means 
would  be  a  very  simple  one. 

But  such  is  not  human  nature.  Every  civilized 
man  demands  that  his  share  of  the  public  burden 
shall  be  fixed  by  law,  and  he  then  contributes  in 
obedience  to  such  law.  We  propose  now  to  ex 
amine  the  relation  of  the  individual  to  the  State, 
and  show  the  working  of  that  system  of  governmental 
machinery  by  which  every  man,  however  peaceful  his 
pursuits,  and  however  difficult  the  division  of  his  prop- 


OUK  DEBT  AND  OUR  TAXES.  61 

erty,  is  made  to  contribute  his  equitable  share  toward 
the  supply  of  the  army  with  those  things  necessary 
to  its  efficiency.  It  has  been  shown  that  by  de 
manding  the  required  contributions  in  the  form  of 
money,  leaving  every  man  at  liberty  to  obtain  the 
money  in  the  easiest  way  he  can,  and  then  buying 
in  the  cheapest  market  with  the  money,  the  work 
of  carrying  on  the  war  will  be  distributed  in  the 
most  advantageous  manner.  Under  ordinary  cir 
cumstances  the  privilege  of  paying  the  contribution 
in  money  offers  a  great  advantage  to  the  tax-payer. 
A  still  greater  advantage  is  attained  by  the  modem 
system  of  borrowing,  provided  that  the  Government 
can  borrow  on  favorable  terms.  The  tax-payer  is 
then  allowed  to  make  his  contribution  in  small 
sums  during  a  long  period  instead  of  paying  it  all  at 
once. 

The  object  of  .the  present  chapter  is  to  discuss 
the  question  whether  the  means  for  the  further  pros 
ecution  of  the  war  should  be  raised  by  loans  or 
taxation.  "What  are  the  advantages  and  disadvan 
tages  -of  a  national  debt  ?  Why  have  any  national 
debt  at  all  ?  Cannot  the  means  necessary  for  the 
prosecution  of  the  war  be  raised  by  taxation  as  ad 
vantageously  as  by  loans?  These  questions  are 
worthy  of  the  gravest  consideration,  not  only  by 
our  statesmen,  but  by  the  people  at  large.  Let  us 
consider  them  in  their  order. 

When  the  national  debt  of  Great  Britain  was 
increasing  at  the  rate  of  forty  millions  sterling  an- 


62          OUK  DEBT  AND  OUR  TAXES. 

nually,  economists  were  not  wanting  who  held  that 
such  a  burden  must  speedily  prove  ruinous  to  the 
financial  interests  of  the  empire.  They  made  a 
mistake  similar  to  that  we  make  when  we  say  we 
have  spent  $3,000,000,000  in  the  present  war, 
forgetting  that  this  expenditure  has  been  contribut 
ed  in  the  form  of  labor,  not  money.  They  forgot 
that  this  debt  was  not  like  one  due  from  one  nation 
to  another,  but  was  all  due  to  the  British  people, 
as  well  as  due  by  the  British  people,  and  that  the 
public  creditors  would  directly  or  indirectly  pay  a 
large  portion  of  the  debt. 

The  debt  went  on  until  it  reached  nearly 
£1,000,000,000  sterling,  and  the  British  empire 
not  only  still  preserved  its  vigour,  but  went  on 
growing  as  rapidly  as  ever.  An  error  of  an  oppo 
site  character  then  began  to  pervade  the  public 
mind.  The  increase  of  wealth  and  power  continu 
ing  in  spite  of  the  debt,  the  latter  was  concluded  to 
be  the  cause  of  the  increase.  Men  gradually  came 
to  consider  it  the  great  consolidating  power  which 
gives  strength  and  permanency  to  the  empire.  The 
payment  of  the  debt  depending  on  the  continuance 
of  the  Government,  every  one  who  holds  a  share  in 
the  public  stocks  is  thought  to  have  an  interest  to 
the  full  amount  of  that  share  in  the  permanence  of 
the  Government.  It  has  been  attempted  to  reason 
in  the  same  way  with  respect  to  the  debt  which  we 
are  accumulating  with  such  unexampled  rapidity. 
Let  us  see,  therefore,  what  foundation  there  really  is 


OUR  DEBT  AND  OUR  TAXES.          63 

for  such  an  opinion,  and  how  far  the  reasoning  is 
applicable  to  our  case. 

Every  one  who  holds  government  bonds  draws 
from  the  Government  interest  on  the  bonds,  and  it 
is  therefore  to  his  advantage  that  the  Government 
should  be  preserved.  But  whence  comes  the  money 
which  pays  the  interest  ?  Does  Government  create 
it?  Not  at  all;  it  must  raise  the  entire  amount 
by  taxation.  The  taxpayers  therefore  have,  alto 
gether,  as  great  an  interest  in  the  destruction  of 
the  Government  as  the  public  creditors  have  in  its 
continuance,  since  as  much  money  is  raised  by  taxes 
as  is  paid  out  in  interest.  The  whole  reasoning 
falls  to  the  ground,  unless  it  is  shown  that  the  bond 
holders  exert  more  political  power  than  the  tax 
payers.  In  England  this  is  undoubtedly  the  case, 
for  three  reasons : 

1.  Political  power  is  there  nearly  proportional 
to  wealth.     The  public  creditors,  belonging,  for  the 
most  part,  to  the  more  wealthy  and  influential  classes 
of  the  community,  hold  in  their  own  hands  a  large 
share  of  the  political  power  of  the  country.     The 
taxes,  being  mostly  levied  on  the  products  of  labor, 
a  considerable  portion  of  them  are  in  reality  paid 
by  those  who  have  no  voice  in  the  affairs  of  Gov 
ernment. 

2.  The  taxes  being  to  a  great  extent  indirect  are 
less  felt  than  if  they  were  drawn  directly  from  the 
pockets  of  those  who  really  pay  them. 

3.  Finally,  the  sentiment  of  justice  will  always 


/   debt. 


64          OUK  DEBT  AND  OUR  TAXES. 

be  felt  to  demand  the  continued  payment  of  the 


Now,  while  the  last  two  causes  may  operate  as 
strongly  in  this  country  as  in  England,  the  first  will 
not.  Here,  wealth  endows  its  possessors  with  less 
political  power  than  there.  In  theory  it  here  en 
dows  them  with  no  power  at  all,  since  no  amount 
of  wealth  gives  its  possessor  more  than  one  vote. 
Our  taxpayers  will  have  half  a  dozen  votes  to  our 
bondholders  one  ;  and  this  state  of  things  will  offer 
the  unprincipled  politician  a  tempting  field  in 
which  to  aggrandize  himself  by  fostering  and  ad 
vocating  the  principles  of  agrarianism.  If,  indeed, 
every  tax-payer  could  be  induced  to  take  such  a 
share  of  the  public  debt  that  he  should  receive  in 
interest  as  much  as  he  paid  in  taxes,  we  should 
have  nothing  to  fear  from  this  cause.  But  the 
idea  of  such  a  division  is  chimerical.  Even  if  ef 
fected,  it  would  not  be  permanent.  The  debt  would 
rapidly  now  out  of  the  hands  of  the  improvident 
into  those  of  the  frugal ;  from  the  hands  of  the  poor 
into  those  of  the  rich ;  from  the  business  man  to  the 
professional  man. 

This  is  not  the  worst ;  it  will  inevitably  gravi 
tate  toward  particular  sections,  on  exactly  the  same 
principles.  It  will  leave  those  sections  where  agri 
cultural,  manufacturing,  and  mining  capital  is 
scarce,  and  accumulate  in  those  sections  where  it  is 
plenty.  The  debt  which  is  held  in  the  West  will 
flow  East  in  exchange  for  agricultural  implements, 


OUR  DEBT  AND  OUR  TAXES.  65 

steam  machinery,  and  the  products  of  our  looms  and 
our  anvils.  Or,  which  amounts  to  the  same  thing, 
it  will  come  East  in  exchange  for  manufactured  " 
articles  on  which  the  Western  men  will  subsist 
while  they  are  erecting  the  mills  and  factories 
and  digging  the  mines  which  are  to  be  the  future 
sources  of  their  wealth.  In  the  East,  where  tho 
mills  and  factories  are  already  built,  and  engaged 
in  actively  competing  with  each  other;  where,  there 
fore,  the  rate  of  interest  and  profit  on  capital  is 
lower,  the  bonds  will  be  relatively  more  valuable, 
for  the  same  reason  that  3  per  cent,  consols  are 
worth  twice  as  much  in  England  as  they  would  be 
in  this  country. 

Thus,  in  a  very  few  years,  four-fifths  of  our  debt 
will  almost  certainly  be  held  in  the  Atlantic  States, 
while  more  than  half  the  taxes  will  have  to  be  paid 
by  the  States  which  own  the  other  fifth.  Holding, 
as  the  latter  will,  more  than  half  the  political 
power,  how  long  before  they  will  forget  the  mills, 
and  factories,  and  fences  for  which  they  have  ex 
changed  the  debt  ?  How  long  before  we  shall  see 
a  race  of  ambitious  and  unprincipled  demagogues 
seeking  to  ride  into  power  by  advocating  some 
policy  by  which  the  Western  people  may  be  reliev 
ed  of  the  taxes  which  they  will  be  paying  to  the 
people  of  other  States  ?  If  we  have  to  wait  long  for 
these  things  there  will  be  a  most  gratifying  im 
provement  in  public  honesty.  Considering  the 
danger  of  such  a  result,  it  must  be  admitted  that 


66  OUR   DEBT   AND   OUE   TAXES. 

our  debt,  if  suffered  to  increase  any  further,  is  more 
likely  to  prove  an  element  of  weakness  by  causing 
an  antagonism  of  interests  between  the  East  and 
the  "West,  than  to  prove  an  element  of  strength  by 
giving  the  public  creditors  an  interest  in  the  con 
tinuance  of  the  Government.  The  attempt  to  ap 
ply  the  English  argument  to  this  country  furnishes 
one  instance  out  of  many  of  the  danger  of  applying 
the  argument  from  analogy  without  due  considera 
tion  of  the  differences  as  well  as  the  likenesses  of 
the  things  compared.  We  see  that  an  argument 
perfectly  legitimate  when  applied  to  a  consolidated 
Government  and  homogeneous  people  like  those  of 
England,  may  prove  entirely  delusive  if  applied  to  a 
heterogeneous  country  like  our  own,  different  sec 
tions  of  which  may  have  entirely  different  pecuniary 
interests. 

Yet  another  argument  frequently  urged  in  favor 
of  raising  money  for  an  important  war  by  loans 
instead  of  taxes,  is  that  the  burde,n  of  the  war  is  thus 
partially  thrown  upon  posterity,  for  whose  benefit  it 
is  fought.  But  we  must  ask  leave  to  dispute  the 
doctrine  that  the  burden  of  war  or  any  other  labor 
performed  by  one  generation  can  be  thrown  on 
another  by  any  means  whatever.  The  generation 
that  wages  the  war  must  be  the  one  to  shed  its 
blood,  feed  its  armies,  and  cast  the  shot  and  shell 
which  its  armies  are  to  use.  Pood,  clothing,  shot 
and  shell  are  the  real  expenses  of  war.  In  running 
into  debt  for  these  articles,  we  do  indeed  bequeath 


OUR  DEBT  AND  OUE  TAXES.  G7 

to  posterity  the  work  of  raising  the  money  to  pay 
for  them.  But  posterity  not  only  rais.es  the  money, 
but  also  receives  the  pay,  so  that  we  may  as  logically 
say  that  posterity  gets  paid  for  the  war  as  to  say 
that  it  pays  for  it.  The  descendants  of  those  who 
have  done  less  than  their  share  pay  the  descendants 
of  those  who  have  done  more ;  but  the  total  amount 
of  wealth  inherited  is  about  the  same,  whether  their 
forefathers  carried  on  the  war  by  loans  or  taxes. 

Supposing  it  equally  easy  to  raise  money  by 
loans  and  by  taxes,  these  two  reasons  are,  it  is  be 
lieved,  the  only  sound  and  forcible  ones  for  prefer 
ring  the  former  plan.  We  have  shown  that  one 
does  not  apply  to  this  country  at  all,  and  that  the 
other  has  no  logical  foundation.  We  are  now  pre 
pared  to  discuss  the  question  from  a  purely  financial 
point  of  view ;  that  is,  to  consider  the  relative  bur 
dens  imposed  on  industry  by  the  two  systems. 
And  here  let  me  say  that  our  erroneous  views  of  the 
reasons  why  a  national  debt  should  be  incurred  at 
all,  are  at  the  bottom  of  all  our  financial  mistakes, 
and  are  the  fruitful  source  of  all  the  difficulties 
which  our  treasury  has  had  to  encounter?  Why 
might  we  not  have  raised  every  dollar  we  needed 
for  the  prosecution  of  the  war  by  taxes  ?  No  doubt 
a  large  majority  of  readers  will  say,  "  Because  it  was 
impossible  to  raise  such  large  sums  by  taxation.  The 
attempts  to  do  so  would  paralyze  industry,  and  thus 
defeat  the  very  object  aimed  at.  We  cannot  possibly 
raise  §1,000,000,000  by  taxation  in  a  single  year." 


68  OUR  DEBT  AND  OUR  TAXES. 

This  doctrine  seems  to  be  so  firmly  rooted  ill  the 
public  mind,  that  the  raising  of  nearly  all  our  war 
expenses  by  loans  has  been  considered  an  imperious 
necessity.  To  this  supposed  necessity  we  have 
patiently  submitted,  under  all  circumstances,  with 
out  once  inquiring  whether  it  was  real  or  imaginary. 

In  opposition  to  this  popular  view  it  is  claimed 
that  a  national  debt  is  only  a  choice  of  evils,  and 
that  under  our  present  circumstances  the  debt  is  a 
greater  evil  than  its  alternative.  In  support  of  this 
I  appeal  to  history.  The  very  idea  of  a  funded 
national  debt  is  a  modern  one.  Nations  have  waged 
war  in  all  ages  on  a  scale  as  grand  as  ours  in  com 
parison  with  their  resources  without  seeking  to  bur 
den  the  future.  It  is  not  likely  that  either  Alexan 
der,  Csesar,  or  Charlemagne,  ever  borrowed  money. 
True,  in  ancient  times  war  could  be  carried  on  with 
less  expense  than  now,  owing  to  the  simplicity  of 
the  equipments  of  an  army ;  but  the  ability  of  the 
people  to  pay  taxes  was  less  in  a  still  larger  ratio. 
Besides,  modern  warfare  has  also  been  conducted  on 
the  largest  scale  without  borrowing  as  wre  do. 
Neither  Louis  XIY.  nor  Charles  Y.  ever  incurred 
a  permanent  debt.  The  most  they  did  was  to 
anticipate  their  revenue  by  issuing  exchequer  bills, 
or  giving  the  public  creditors  a  lien  on  particular 
taxes. 

Indeed,  the  rate  at  which  we  are  borrowing  has 
no  precedent  in  the  history  of  nations.  The  great 
est  loans  ever  attempted  even  by  Great  Britain,  are 


OUR  DEBT  AND  OUR  TAXES.  69 

insignificant  when  compared  with  ours.  During  the 
first  sixteen  years  of  the  present  century,  when  that 
power  was  engaged  in  the  most  gigantic  efforts  which 
her  history  has  recorded,  she  only  borrowed,  on  an 
average,  £22,000,000  sterling,  or  $106,000,000  per 
annum,  and  the  greatest  amount  ever  borrowed  in  one 
year  was  less  than  §200,000,000.  These  loans  only 
sufficed  to  pay  the  interest  on  the  debt  previously 
contracted,  so  that  her  entire  war  expenses  during 
her  struggle  with  Napoleon  were  sustained  by  taxa 
tion.  We  are  now  borrowing  at  the  rate  of  $600,- 
000,000  per  annum.  Moreover,  as  the  real  burden 
of  the  debt  is  to  be  measured  by  the  interest  and 
not  by  the  principal,  and  as  we  are  paying  half  as  / 
much  interest  again  as  England  did,  it  follows  that 
we  are  practically  running  into  debt  eight  or  ten 
times  as  fast  as  England  did  during  the  wars  with 
Napoleon.* 

*  In  the  beginning  of  1801,  the  public  debt  of  Great  Britain 
amounted  to  £528,000,000.  The  following  table  shows,  in  round 
numbers  the  sums  borrowed  in  each  subsequent  year,  allowing  for  the 
excess  of  exchequer  bills  issued  over  those  redeemed : 

1801,  £28,000,000  =  $136,000,000 

1802,  £21,000,000  =  $102,000,000 

1803,  £15,000,000  =  $73,000,000 

1804,  £18,000,000  =  $87,000,000 

1805,  £20,000,000  =  $97,000,000 

1806,  £18,000,000  =  $87,000,000 

1807,  £12,000,000  =  $58,000,000 

1808,  £15,000,000  =  $73,000,000 

1809,  £17,000,000  =  $82,000,000 

1810,  £13,000,000  =  $63,000,000 


TO  OUR  DEBT  AND  OUR  TAXES. 

But  tlie  claim  needs  no  appeal  to  history  to  sub 
stantiate  it.  The  very  fact  that  we  have  spent 
$1,000,000,000,  a  year  in  war,  without  producing 
any  sensible  increase  in  the  values*  of  goods  with 
out  driving  all  our  gold  out  of  the  country,  and 
without  causing  any  general  distress  among  the 
poor,  does  of  itself  furnish  the  most  conclusive  proof 
that  we  could  have  raised  this  amout  by  some 
system  of  taxation.  "We  have  seen  in  the  last 
chapter  that  when  we  say  we  have  spent  all  this 
money,  we  only  mean  that  individuals  of  the  nation 
have-  done  $1,000,000,000  worth  of  work  for  the 
Government.  We  have  also  seen  that  the  possession 

1811,  £21,000,000  =  $102,000,000 

1812,  £29,000,000  =  $140,000,000 

1813,  £24,000,000  =  $116,000,000 

1814,  £26,000,000  =  $126,000,000 

1815,  £21,000,000  =  $102,000,000 


Total,  £298,000,000=$1,244,000,000 

During  the  last  three  years  about  £37,000,000  additional  was  bor 
rowed  and  loaned  to  foreign  Powers,  making  a  total  increase  of  the 
national  debt  of  £335,000,000,  or  $1,621,000,000  during  the  fifteen 
years ;  a  little  more  than  half  the  debt  we  have  incurred  in  four  years. 
The  average  rate  of  interest  was  generally  about  five  per  cent,  on  the 
sums  actually  paid  into  the  treasury.  The  notion  that  the  money  was 
borrowed  on  unfavorable  terms,  because  the  debt  contracted  was  fre 
quently  in  excess  of  the  sums  received,  is  founded  on  a  misapprehen 
sion.  Five  per  cent,  stock  was  nearly  always  worth  par ;  and  it  was  when 
the  rate  of  interest  was  only  three  per  cent,  on  the  nominal  par  value 
of  the  stock,  that  £100  of  the  latter  was  exchanged  for  £60  in  money. 
*  By  the  "  value  of  goods  "  is  meant  their  gold  value,  and  not 
their  market  price  measured  by  the  depreciating,  uncertain,  and  ever 
varying  standard  which  the  legal  tender  act  has  authorized. 


OUR  DEBT  AND  OUR  TAXES.  71 

of  money  adds  nothing  to  the  amount  of  work 
which  individuals  can  do  for  the  Government.  At 
the  worst,  then,  this  labor  could  all  have  been  de 
manded  as  commutation  for  a  special  war  tax.  Let 
us,  however,  go  further  into  details. 

It  has  already  been  shown  that  the  only  possible 
way  in  which  a  nation  can -equip  an  army  from  its 
own  resources  is  by  turning  a  certain  amount  of  its 
industry  into  the  channels  of  war  ;  that  the  military 
power  of  the  nation  is  measured  by  the  amount  of 
industry  which  can  be  thus  diverted  ;  and  that  the 
amount  depends  on  the  ability  of  the  people  to  do 
more  than  supply  their  own  wants.  We  have  also 
seen  that  money  does  not  increase  the  power  of 
diverting  labor,  but  only  furnishes  a  means  of 
making  every  individual  do  his  just  share. 

Suppose,  now,  that  we  wish  to  devote  one-fourth 
of  the  entire  productive  power  of  the  country  into 
the  channels  of  war ;  in  other  words,  that  we  con 
sider  it  necessary  to  employ  one-fourth  of  the  entire 
productive  population  in  the  manufacture  of  war 
material.  We  then  levy  a  tax  of  25  per  cent,  on 
the  entire  production  of  the  country.  One-fourth 
the  breadstuifs  raised  by  the  farmer  will  feed  the 
government  employes,  with  their  wives  and  chil 
dren.  One-fourth  the  products  of  the  looms  will 
clothe  them.  In  fine,  the  required  fourth  being 
paid  the  Government  in  the  form  of  money,  that 
money  will  enable  the  government  employes  not  in 
the  field  to  enjoy,  on  the  average,  the  same  comforts 


72          OUR  DEBT  AND  OUR  TAXES. 

that  the  remaining  three-fourths  of  the  community 
do. 

Can  the  productive  population  spare  one-fourth  of 
all  they  produce,  and  still  have  enough  left  for  them 
selves  ?  Yes  :  because  they  actually  do  it.  At  least 
one-fourth  of  our  productive  population  is  actually 
engaged  in  carrying  on.  the  war,  yet  our  farmers  do 
raise  enough  to  feed  them,  and  our  factories  to 
clothe  them.  The  only  essential  respect  in  which 
the  plan  marked  out  differs  from  that  actually 
adopted  is  this  :  instead  of  demanding  the  required 
fourth  as  a  tax  we  accept  it  as  a  loan,  giving  the 
producer  promissory  notes  labelled  "  United  States 
will  pay  "  in  exchange  therefor.  As  this  note  does 
not  minister  to  any  bodily  want,  the  nation  at  large 
is  none  the  richer  for  its  issue. 

Another  objection  has  more  weight.  Would 
not  so  heavy  a  tax  discourage  industry,  and  lead 
men  to  give  up  producing  every  thing  not  absolutely 
essential  to  their  subsistence  ?  This  question  can 
be  answered  only  by  judging  from  experience  and 
analogy.  In  recent  times,  we  have  no  example  of 
so  heavy  a  tax.  But  it  would,  in  its  effects  on  in 
dustry,  be  precisely  similar  to  a  forcible  deprivation 
of  such  portion  of  our  mechanical  power,  and  labor- 
saving  machines,  that  men  would  hav^e  to  do  one- 
third  more  labor  to  produce  the  same  amount  of 
goods.  As  an  example,  take  the  production  of 
wheat.  Suppose  that  by  the  use  of  sowing,  reap 
ing,  and  threshing  machines,  a  farmer  can  raise 


OUR  DEBT  AND  OUR  TAXES.          73 

four  bushels  of  wheat  with  the  labor  required  to 
raise  three  without  those  aids.  It  is  then  a  matter 
of  entire  indifference  -  to  him  whether  you  tax  him 
with  one-fourth  of  his  crop,  or  deprive  him  of  the  use 
of  the  machines.  The  tax  simply  deprives  him  of 
that  additional  fourth  of  his  crop  which  the  machine 
enabled  him  to  raise.  The  question  then  takes  this 
shape :  What  would  be  the  effect  on  industry  of 
depriving  the  nation  of  so  much  machinery  that 
one-third  more  labor  would  be  required  to  produce 
the  same  amount  of  wealth  ?  Here  we  can  appeal 
to  experience.  Ten,  twenty,  or  perhaps  fifty  years 
ago  our  people  were  in  this  very  position.  They 
did. not  possess  our  improved  machinery,  and  there 
fore  had  to  labor  one-third  more  than  we  do  to  at 
tain  the  same  result.  Was  industry  then  paralyzed  ? 
No !  They  worked  harder  than  we  do.  They 
devoted  a  much  larger  portion  of  their  labor  to 
articles  of  prime  necessity,  and  less  to  the  improve 
ment  of  their  minds  and  the  gratification  of  their 
tastes. 

If,  then,  our  circumstances  were  changed  to 
correspond  to  theirs,  would  not  our  industry  take 
the  same  general  form  that  theirs  did  ?  Undoubted 
ly  it  would.  The  farmer  would  raise  full  as  much 
wheat  and  the  manufacturer  spin  as  much  cotton,  if 
one-fourth  of  his  products  went  for  the  public  bene 
fit,  as  he  now  does.  Therefore,  an  enormous  tax  of 
this  kind  is  not  so  ruinous  as  might  at  first  sight  be 
supposed. 

4 


74:  OUR  DEBT   AND   OTJE   TAXES. 

As  an  actual  example  of  the  continuance  of  prof 
itable  industry  in  spite  of  the  taxes,  we  may  cite 
the  prosperity  of-  commerce  under  import  duties  of 
twenty,  thirty,  or  even  fifty  per  cent.  Suppose  that 
for  a  century  commerce  had  been  perfectly  free,  and 
that  it  had  then  been  proposed  to  try  the  experi 
ment  of  a  duty  of  only  ten  per  cent,  on  all  imports. 
We  should  have  heard  a  universal  cry  that  the 
measure  would  be  an  embargo  on  all  commerce. 
It  would  be  easily  proved  that  importers  did  not 
and  could  not  make  ten  per  cent,  profit,  and  the 
conclusion  would  be  hastily  reached  that  no  one 
would  pay  the  increased  price  for  imported  goods. 
And  it  must  be  admitted  that  if  tried  as  a  tempo 
rary  experiment,  the  duties  would  really  be  found  to 
produce  the  predicted  evils.  At  first  commerce 
would  be  paralyzed  and  industry  disturbed.  The 
importation  of  some  goods  might  be  stopped  alto 
gether.  Yery  soon,  however,  industry  would  flow 
into  the  new  and  modified  channels,  people  would 
become  accustomed  to  the  new  state  of  things,  and 
no  one  would  be  sensible  of  reaping  any  less  enjoy 
ment  from  his  labor. 

Yery  similar  would  be  the  effects  of  a  special 
war  tax,  or  a  return  to  the  imperfect  machinery  of 
former  times  on  domestic  production.  Under  any 
circumstances,  it  is  admitted  that  a  certain  length 
of  time,  one,  two,  or  perhaps  three  years  would 
be  required  for  industry  to  accommodate  itself  to 
the  new  order  of  things.  This  change  once  effected, 


OUK  DEBT  AND  OUB  TAXES.  75 

the  tax  would  not  be  seriously  felt.  But  the 
greatest  objection  of  all  is  found  in  the  fact  that  if 
the  tax  were  merely  temporary  (and  being  a  war 
tax  it  would  be  temporary),  industry  might  not 
attempt  to  accommodate  itself  to  the  new  order  of 
things.  To  take  up  once  more  the  illustration  by 
the  case  of  our  being  obliged  to  relinquish  the  use 
of  improved  machinery  ;  it  cannot  be  denied  that  if 
the  deprivation  were  likely  to  last  but  a  single  year, 
men  would  try  to  eke  out  their  old  stock  of  goods, 
and  get  along  with  the  smallest  possible  amount  of 
new  manufactures.  The  pro  rata  tax  on  produc 
tion  ought,  therefore,  to  be  a  permanent  one,  to  be 
applied  to  the  extinction  of  the  public  debt. 

How  shall  this  difficulty  be  avoided  \  By  levy 
ing  the  tax  not  on  production  itself,  but  on  the 
productive  powers.  Levy  one-fourth,  not  of  the 
actual  production,  .but  of  what  the  individual  is 
capable  of  producing.  Every  man  is  capable,  by 
the  use  of  his  hands  or  his  brains,  of  earning  a 
certain  sum  of  money  annually.  Demand  from 
him  one-fourth  of  this  sum,  leaving  him  at  liberty 
to  earn  the  other  three-fourths  or  not,  as  he  pleases. 
There  would  be  required  in  each  congressional  dis 
trict  an  enrolling  officer,  whose  business  it  would 
be  to  make  a  register  of  every  male  inhabitant 
above  the  age  of  sixteen,  capable  of  employing  his 
faculties  so  as  to  benefit  the  public.  Among  these 
individuals  the  tax  would  be  divided,  each  man's 
share  being  determined  by  his  profession,  his  m- 


76  OTJE   DEBT   AND   OUK   TAXES. 

come,  and  his  wealth.  Regard  might  also  be  had 
to  the  number  of  persons  dependent  on  him  for 
support.  And  ki  case  any  one  man  should  not  be 
able  to  dispose  of  sufficient  of  the  products  of  his 
labor  'to  enable  him  to  pay  the  tax,  the  alternative 
ought  to  be  kept  open  to  him  of  commuting  his  tax 
by  working  for  the  Government.  Is  he  a  laborer  ? 
He  can  enlist  in  the  army.  A  farmer  ?  He  must 
sow  a  larger  field  of  wheat  so  as  to  be  able  to  raise 
his  tax  money  by  selling  the  surplus  to  the  Govern 
ment.  A  shoemaker?  He  must  be  allowed  to 
make  shoes  enough  for  the  Government  to  pay  his 
tax.  Thus  it  will  be  found  that  there  is  not  an 
able-bodied  man  in  the  community  but  can  in  some 
way  contribute  his  clue  share. 

The  tax  on  the  mercantile  portion  of  the  com 
munity,  using  the  term  mercantile  in  its  largest 
sense,  as  including  every  one  \\;ho  lives  by  buying 
and  selling  at  a  profit,  would  be  yet  more  easy.  It 
would  best  be  levied  as  a  percentage,  not  on  profits, 
but  on  gross  sales.  The  tax  would  then  include  the 
income  as  well  as  the  per  capita  tax. 

The  income  tax  would  be  assessed  on  every 
producer  or  manufacturer  who  earned  more  than 
the  average  amount  fixed  for  his  particular  profes 
sion,  and  on  which  the  per  capita  tax  was  levied. 

Finally,  we  have  the  tax  on  capital.  Capital 
gives  to  its  possessor  a  certain  advantage  in  produc 
tion  which  is  represented  by  the  rate  of  inte'rest. 
Taking  the  country  at  large,  every  man  who  owns 


OUR  DEBT  AND  OUR  TAXES.          77 

$100  worth  of  property  can  so  use  that  property  as 
to  earn  from  $6  to  $8  per  year  more  than  he  could 
earn  without  it.  A  tax  of  one-fourth  on  produc 
tion  would  then  involve  a  tax  of  from  1J-  to  2 
per  cent,  on  property.  As  a  matter  of  public 
policy,  however,  it  is  advisable  that  this  source  of 
power  should  bear  a  much  larger  proportion  of  an 
extraordinary  expense  like  that  of  war,  than  mere 
labor.  For  in  such  a  case  the  tax  must  be  appor 
tioned,  in  a  great  measure,  according  to  the  ability 
of  the  payer.  Now  the  capitalist  has  the  same 
facilities  with  the  man  who  owns  nothing  but  his 
hands ;  and  if  we  taxed  him  with  the  entire  interest 
on  his  capital,  he  would  have  left,  on  the  average, 
as  large  an  income  as  a  man  of  equal  ability  would 
be  earning  without  capital. 

Such  a  system  is  the  alternative  of  a  national 
debt  in  carrying  on  the  war.  In  practice  it  would 
not  be  found  so  oppressive  as  might  be  supposed  at 
first  sight,  because  the  Government  would,  on  the 
average,  be  a  customer  buying  goods  to  the  same 
extent  that  it  would  be  a  creditor  demanding  pay 
ment.  All  the  money  received  from  the  people 
would  go  directly  back  to  the  people,  and  indirectly, 
in  a  great  measure,  to  the  very  persons  who  con 
tributed  it.  If  the  farmer,  for  example,  was  re 
quired  to  contribute  the  value  of  one-fourth  of  his 
crop,  either  the  Government  or  persons  in  Govern 
ment  employ  would  supply  him  with  the  required 
money  by  buying  one-fourth.  Thus,  practically,  the 


78          OUK  DEBT  AND  OUR  TAXES. 

tax  would  be  paid  in  the  form  of  wheat,  cloth,  and 
horses ;  just  what  the  Government  wants. 

In  arbitrary  oppressiveness  the  system  would  not 
be  comparable  with  the  Conscription  Law,  even  in 
the  mild  form  in  which  we  execute  the  latter.  Yet 
we  have  seen  the  latter  passed,  executed,  and  ap 
proved  by  the  people  subject  to  it  without  complaint 
on  the  score  of  its  oppressiveness.  !N"o  one  has  dared 
to  say  that  a  dishonorable  peace  would  be  preferable 
to  impressing  men  into  the  military  service  by 
draft. 

As  an  example  of  the  system  proposed,  if  it  is 
resolved  that  we  shall  go  on  without  any  further  in 
crease  of  the  public  debt,  on  the  basis  of  an  annual 
expenditure  of  $900,000,000,  we  may  very  roughly 
estimate  that  the  basis  of  the  taxes,  and  the  taxes 
themselves,  would  be  something  like  the  following : 

Able  productive  males 4,000,000 

Annual  product  of  their  labor $3,000,000,000 

Valuation  of  capital 10,000,000,000- 

The  special  and  extraordinary  taxes  would  be 
levied  each  year  separately  by  act  of  Congress,  and 
would  be — 

1.  Tax  on  occupation,  varying  from — say  $30  for  an 
unskilled  laborer,  to  $100  or  $200  for  men  of  the 

liberal  professions,  averaging  $50,  would  yield $200,000,000 

2.  Income  tax  of  20  per  cent,  on  all  who,  from  supe 

rior  talents,  skill,  or  fortune,  do  actually  earn  more 

than  the  minimum  on  which  the  first  tax  is  levied. .       70,000,000 

3.  Property  tax  of  24-  per  cent 250,000,000 


OUE  DEBT  AND  OUR  TAXES.          79 

The  ordinary  taxes,  to  be  continued  after  the  close  of 
the  war,  and  applied  to  the  extinction  of  the  public 
debt  already  contracted,  can  easily  be  increased  to.  400,000,000 

Making  a  total  revenue,  ordinary  and  extraordinary, 

of 920,000,000 

"We  have  suggested  a  large  income  tax  on  special 
classes ;  but  it  must  be  confessed  that  although  in 
theory  such  a  tax  is  the  most  just  and  equitable 
that  can  be  assessed,  it  is  in  practice  the  most  un 
equal.  It  is  notorious  everywhere  in  our  country, 
that  people  enjoying  much  more  than  the  average 
amount  of  wealth,  and  living  in  a  luxurious  style, 
do  still  pay  an  insignificant  income  tax.  This  does 
not  always  arise  from  intentional  dishonesty.  Al 
though  the  word  u  income"  may  in  the  abstract  be 
susceptible  of  very  exact  definition,  uncertainty  and 
doubt  must  continually  arise  in  applying  the  defini 
tion  to  individual  cases.  The  utmost  latitude  of  in 
terpretation  is  allowed  to  every  one  who  does  not 
live  on  a  fixed  salary.  Hence  the  taxes  ought, 
whenever  possible,  to  take  some  other  form  than 
this. 

The  conditions  under  which  a  national  debt  may 
be  advantageous  may  be  seen  by  comparing  the 
working  of  the  above  system  with  that  which  we 
have  adopted.  The  tax-paying  community,  with 
respect  to  occupation,  may  be  divided  into  three 
classes : 

1.  Men  whose  occupation  does  not  require  the 
use  of  capital.  This  class  includes  laborers,  profes- 


80  OUK   DEBT   AND   OUK   TAXES. 

sional  men,  Government  officers,  and  all  who  work 
for  salary,  wages,  or  fees. 

2.  Men  w.ho  use  capital,  whether  their  own  or 
that  of  others,  and  are  responsible  for  its  profitable 
employment,  whether  they  be  farmers,  manufactur 
ers,  or  merchants. 

3.  Men  who  own  capital,  but  instead  of  using  it 
themselves  loan  it  to  others.     Such  are  owners  of 
shares  in  all  institutions  which  own  money,  and  all 
who  loan  money  themselves. 

It  is  singular  that  we  have  no  words  in  the  Eng 
lish  language  which  accurately  designate  these  three 
classes  of  producers.  For  want  of  better  names 
they  may  be  called  workmen,  business  men,  and 
capitalists. 

The  ranks  of  the  third  class  are  naturally  re 
cruited  from  those  of  the  first ;  and,  indeed,  the  two 
are  to  a  great  extent  identical  in  this  country.  The 
workman  who  loans  his  money  to  his  employer  or 
puts  it  into  a  savings  bank,  and  the  professional  man 
who  invests  his  money  in  bonds  of  any  kind,  become 
capitalists  to  the  extent  of  their  savings.  The  class 
of  men  who  live  exclusively  on  the  interest  of  their 
money  is  quite  small  in  this  country. 

Now,  when  the  special  war  tax  is  assessed,  it 
may  happen  that  the  workman  who  has  not  been 
frugal  cannot  pay  his  entire  assessment  during  the 
year,  and  cannot  enter  the  Government  service 
without  serious  inconvenience  to  his  family.  It 
may  also  happen  that  the  business  man  is  employing 


OUR  DEBT  AND  OUR  TAXES.          81 

his  capital  so  profitably,  or  that  all  he  has  is  so  ne 
cessary  to  his  business  that  his  profits  will  be  mate 
rially  curtailed  by  the  loss  of  what  he  has  to 
pay  for  carrying  on  the  war.  A  farmer,  for  in 
stance,  wrho  is  assessed  $100,  may  need  all  the 
money  he  can  raise  for  the  purchase  of  agricultural 
implements  and  the  payment  of  his  laborers.  The 
permission  to  apply  his  assessment  to  this  purpose 
may  enable  him  to  raise  $10  worth  additional  of 
wheat.  He  may  then  appeal  to  a  capitalist  who 
can  not  only  pay  his  own  share  but  the  farmer's  also, 
to  loan  him  the  money  at  6  per  cent,  interest,  and 
thus  make  a  bargain  that  shall  be  mutually  advan 
tageous.  But  the  capitalist  may  not  be  willing  to 
trust  the  farmer.  Here  the  Government  steps  in 
and  borrows  the  $100  from  the  capitalist,  trusting 
to  gradually  obtain  principal  and  interest  from  the 
farmer  in  the  form  of  taxes.  This  national  debt  is 
incurred  for  the  farmer's  benefit,  who  is  enabled  to 
lay  out  $100  more  on  his  farm,  on  condition  of  pay 
ing  the  Government  the  annual  interest  on  that 
sum. 

Herein  lies  the  sole  economical  advantage  of  a 
public  debt.  It  enables  that  portion  of  the  com 
munity  which  is  in  the  greatest  want  of  capital,  to 
keep  possession  of  what  they  have,  or  to  add  more 
to  it  by  paying  the  Government  the  annual  inter 
est  on  the  money  they  actually  owe  it.  So  long 
as  the  Government  can  borrow  on  such  favorable 
terms  that  it  would  be  to  the  advantage  of  the  tax- 
4* 


82  OUR  DEBT  AND  OUK  TAXES. 

payers  generally  to  borrow  on  the  same  terms,  so 
long  is  the  public  debt  a  public  advantage,  and  no 
longer.  The  great  practical  question  now  is,  does 
our  Government  borrow  money  on  such  terms? 
Let  us  see. 

A  five  per  cent,  bond,  interest  payable  in  gold, 
can  now  be  sold  for  par  in  currency  ;  but  one  dollar 
of  this  currency  is  worth  little  more  than  40  cents 
in  gold,  so  that  we  are  really  paying  12  per  cent, 
interest  on  the  actual  amount  we  borrow.  Is  it  to 
the  advantage  of  our  taxpayers  generally  to  bor 
row  money  at  12  per  cent,  interest  ?  Few,  I  think, 
will  hold  that  it  is.  Then,  it  cannot  tend  to  the 
public  benefit  for  our  Government  to  incur  any 
further  debt,  for  in  doing  so  it  is,  as  the  agent  of  the 
citizens,  borrowing  money  for  them  on  exorbitant 
terms. 

In  answer  to  this  there  is  an  argument  for  pre 
ferring  indirect  taxation  extending  over  a  long 
period,  to  a  large  and  temporary  direct  tax,  which 
it  is  well  to  consider,  granting  that  it  is  not  for  the 
actual  pecuniary  interest  of  the  citizen  to  borrow 
money  on  these  terms ;  it  is  said  that  the  object  of 
the  Government  is  not  to  raise  the  money  in  that  way 
which  conduces  most  to  the  real  welfare  of  the  com 
munity,  but  in  such  a  way  as  to  cause  the  least  amount 
of  complaint.  If  every  man  calculated  exactly  what 
was  for  his  best  interests,  these  two  ways  would  be  iden 
tical.  But  men  generally  do  not  make  such  calcula 
tions.  Thus,  an  attendant  at  church  will  drop  twenty- 


OUR  DEBT  AND  OUK  TAXES.  83 

five  cents  into  the  contribution-box  every  Sunday 
without  any  complaint,  when  he  would  complain 
very  loudly  if  obliged  to  give  twelve  dollars  once  a 
year,  although  the  latter  is  really  more  to  his  advan 
tage  than  the  former.  Moreover,  the  interest  on  the 
debt  will  gradually  be  paid  in  taxes  which  are  in 
direct  and  insensible,  being  paid  the  Government 
by  manufacturers  who  simply  charge  them  to  their 
customers  by  increasing  the  price  of  their  goods.  It 
will  thus  happen  that  the  owner  of  a  hundred  dol 
lar  bond  will  feel  richer  for  possessing  it,  though 
obliged  to  pay  indirectly  fifteen  dollars  a  year  in 
taxes  for  interest  on  his  own  bond. 

To  a  politician,  whose  maxim  is,  "after  me  the 
deluge,"  such  an  argument  as  this  is  very  accepta 
ble.  But  it  is  unworthy  the  statesman  whose  ob 
ject  is  the  real  good  of  the  nation.  So  long  as  the 
entire  peace  expenses  of  the  Government,  including 
interest  on  the  public  debt,  can  be  paid  by  insensi 
ble  indirect  taxes,  it  may  be  well  to  borrow,  even 
on  terms  somewhat  unfavorable.  But  we  are 
speedily  approaching,  if  we  have  not  already  reach 
ed,  the  point  at  which  insensible  indirect  taxes  will 
no  longer  suffice  for  these  objects.  "When  all  claims 
growing  out  of  the  war  are  adjusted,  and  the  entire 
debt  is  funded,  the  annual  interest  alone  will  prob 
ably  amount  to  §150,000,000,  though  the  rebellion 
should  be  suppressed  immediately.  But  in  view  of 
the  facts  that  the  war  for  the  Union  may  last  much 
longer,  that  when  it  is  over  we  may  be  engaged  in 


84.  OUR   DEBT   AND   OUK   TAXES. 

war  with  a  European  power,  and  that  a  tax  on  in 
dustry  heavier  than  that  under  which  we  now  labor 
will  discourage  emigration,  and  thus  impede  the 
development  of  our  resources,  the  argument  in 
question  invites  us  to  risk  our  future  happiness 
in  order  to  gratify  a  present  supineness. 

It  is,  indeed,  a  general  and  very  sound  rule,  that 
taxes  on  production,  paid  indirectly  by  the  con 
sumer  of  the  articles  taxed,  are  to  be  preferred  to 
direct  taxes,  not  merely  because  the  consumer  does 
not  feel  that  he  is  paying  a  tax,  but  because  he  can 
select  his  own  time  of  payment.  Such  rules  are 
very  good  when  the  object  is  to  raise  a  small 
and  definite  annual  sum  in  the  easiest  way  ;  but  to 
apply  it  to  a  people  in  our  situation,  is  as  if  a  man 
should  regulate  his  exertions  to  save  his  house  from 
burning  down,  by  the  rules  respecting  exercise  laid 
down  by  physiologists. 

The  increase  of  the  public  debt  by  selling  bonds 
for  forty  cents  on  the  dollar  tends  to  the  unequal 
distribution  of  the  burdens  of  war.  If  principal 
and  interest  of  the  debt  is  really  paid  in  gold,  then 
the  bondholders  will  be  profited  at  the  expense  of 
the  taxpayers,  who  will  have  to  pay  just  double 
their  right  share.  If  they  are  paid  in  paper,  it  will 
make  a  complete,  lottery  out  of  the  entire  debt,  as 
we  shall  very  clearly  see  in  a  subsequent  chapter. 
If  they  are  not  paid  at  all  (which  God  forbid  !)  the 
burden  of  the  war  will  fall  entirely  on  the  bond 
holders.  Thus,  all  is  chance  where  all  should  be 
certainty. 


OUR  DEBT  AND  OUB  TAXES.          85 

If,  indeed,  the  debt  were  distributed  in  exact  pro 
portion  to  the  taxes  to  be  paid  so  that  every  one 
should  pay  out  in  taxes  as  much  as  he  received  in 
interest,  it  would  cease  to  be  a  burden.  The  idea 
of  such  a  distribution  has  already  been  shown  to  be 
chimerical ;  and  if  it  were  possible,  there  would  be 
need  of  incurring  the  debt.  For  if  a  man  has  mon 
ey  to  loan  the  Government,  he  certainly  has  money 
to  pay  the  Government  what  he  owes  it.  His  share 
of  the  debt  has  been  incurred  solely  because  it  is 
presumed  he  has  no  money  to  spare. 

In  fine,  let  us  try  to  put  the  matter  into  a  nut 
shell.  Here  are  twenty  millions  of  people  who  are, 
together,  to  do  a  certain  large  and  unusual  amount 
of  work,  in  the  way  of  fighting  and  manufacturing 
munitions  of  war. 

Under  our  present  system,  every  one  who 
chooses  is  allowed,  if  he  escapes  conscription,  to 
stay  at  home  and  do  absolutely  nothing  to  advance 
the  common  cause  except  pay  an  insignificant  in 
direct  tax.  Those  who  really  do  the  work  are  stim 
ulated  thereto  by  promises  to  pay,  which  the  Gov 
ernment  agrees,  at  some  future  time,  to  make  good 
from  the  proceeds  of  taxes  which  are  to  be  paid 
by  the  present  do  nothing  class.  Clearly,  when 
these  promises  have  depreciated  to  forty  cents  on 
the  dollar,  it  is  time  some  other  system  were  adopt 
ed. 

Our  true  policy  is  to  demand  that  every  man, 
without  exception,  shall  come  forward  and  do  his 


86  OUK  DEBT  AND  OUR  TAXES. 

share  of  the  work.  Whenever  we  organize  such  a 
system  that  this  demand  is  complied  with  by  all,  the 
necessity  for  borrowing  will  cease. 

Even  though  the  war  should  end  immediately, 
such  a  special  war  tax  would  be  advisable,  in  order 
to  raise  money  to  pay  outstanding  claims.  The 
general  opinion  seems  to  be  that  the  unadjusted 
debt  amounts  to  more  than  five  hundred  millions ; 
and  that  if  our  entire  army  were  disbanded  to-mor 
row,  we  shall  actually  find  ourselves  owing  this  sum 
to  individuals. 

Thus  the  conclusion  seems  unavoidable  that 
every  consideration  of  sound  policy  demands  a  stop 
to  the  further  increase  of  our  debt,  and  the  levy  of 
taxes  sufficient  to  meet  all  the  future  expenses  of 
the  war. 

Ought  the  public  debt  to  be  subject  to  taxa 
tion? 

There  is  no  reason  why  the  owner  of  a  Govern 
ment  bond  should  not  pay  the  same  tax  on  it  as  on 
any  other  property  of  the  same  kind.  The  man 
who  loans  money  to  the  Government,  does  not 
thereby  resign  either  the  real  ownership  or  the  bene 
fits  of  the  money,  for  it  is  all  to  be  returned  to  him ;  he 
ought,  therefore,  to  pay  the  same  taxes  on  it  that  he 
would  pay  if  he  kept  it  for  his  own  use.  If  he 
lent  his  entire  property  to  the  Government,  when 
the  debt  was  discharged  he  would  get  it  all  back 
again  without  having  paid  any  tax  on  it  at  all, 
unless  his  bond  was  taxed. 


OUR  DEBT  AND  OUR  TAXES.  87 

When  the  Government  sells  bonds  with  a  pledge 
that  they  shall  not  be  taxed,  in  order  to  get  more 
for  them,  it  amounts  to  selling  out,  in  advance,  all 
the  taxes  to  which  the  bonds  might,  in  common 
with  other  personal  property,  become  subject.  This 
"  farming  out  "  of  taxes  to  be  collected,  for  this  is 
what  the  contract  amounts  to,  is  the  worst  possible 
way  of  borrowing  money.  It  was  an  accompani 
ment,  partly  cause  and  partly  effect,  of  that  miser 
able  condition  of  the  finances  of  France  which 
preceded  the  first  revolution.  If,  then,  it  has  proved 
disadvantageous  when  the  amount  of  the  tax  is 
known  beforehand,  how  much  more  so  in  the 
present  case,  when  no  one  can  know  how  heavy  a 
property  tax  the  Government  may  have  to  levy  ? 
The  increased  price  obtained  fqr  the  bonds  is  prob 
ably  quite  small,  perhaps  insignificant ;  yet,  if  the 
Government  should  think  proper  to  levy  a  prop 
erty  tax  of  five  per  cent,  it  would  lose  $100,000,000 
by  being  obliged  to  remit  the  tax  on  the  pres 
ent  public  debt.  It  is,  therefore,  to  be  hoped 
that  in  the  sales  of  bonds  to  be  hereafter  authorized, 
the  Government  will  bind  itself  only  to  levy  no 
higher  taxes  on  them  than  on  other  personal  prop 
erty. 


CHAPTER  IY. 

THE     LEGAL     TENDER     NOTES THEIR     INFLUENCE     ON 

PUBLIC    CREDIT. 

DURING  the  third  session  of  the  thirty-seventh 
Congress,  in  the  winter  of  1861— '2,  the  financial  sit 
uation  of  the  Government,  on  a  superficial  view, 
presented  many  inauspicious  features.  To  the 
public  mind  the  future  was  all  doubt  and  uncer 
tainty.  A  war  of  unknown  duration,  with  expend 
itures  of  unheard  of  magnitude,  were  in  prospect. 
We  had  but  a  faint  idea  of  our  capacity  for  sustain- ' 
\  ing  a  long  war.  Forty  millions  of  demand  notes 
were  in  circulation,  and  payment  would  be  due 
whenever  the  holders  chose  to  ask  for  it.  A  much 
larger  debt,  in  the  form  of  interest-bearing  treasury 
notes,  would  be  due  at  various  intervals  during  the 
next  three  years.  During  the  same  period  the  debt 
would  be  increased  many  fold  by  the  vast  war  ex 
penditures.  There  was  no  prospect  that  the  money 
required  by  the  Government  could  be  borrowed  on 
favorable  terms,  and  a  system  of  taxation  was 
hardly  thought  of.  The  State  banks,  through  which 
the  war  loans  had  hitherto  been  negotiated,  could 


LEGAL  TENDER  NOTES.  89 

supply  no  more  money.  Six  per  cent,  stock,  which, 
in  prosperous  times,  would  command  a  heavy  pre 
mium,  was  at  a  discount  of  from  seven  to  fifteen 
per  cent.  Its  price  would  probably  fall  lower  yet ; 
how  much  lower  no  one  could  divine. 

Matters  were  made  worse  by  the  general  sus 
pension  of  specie  payments  by  the  banks  at  the  end 
of  1861.  There  would  be  a  general  flow  of  the 
demand  notes  to  the  Treasury  for  redemption.  To 
prevent  this  flow  the  Treasury  ignobly  followed  the 
example  of  the  banks,  by  refusing  to  redeem  the 
notes. 

February  25,  1862,  an  act  was  passed  author 
izing  the  issue  of  certain  United  States  notes.  The 
provisions  of  this  act  are  too  well  known  to  require 
any  statement  of  them.  There  has,  indeed,  been 
some  difference  of  opinion  whether  the  notes  thus 
authorized  ought  to  be  called  "  paper  money,"  and 
spoken  of  as  "  irredeemable ; "  but  this  is  purely  a 
question  of  terminology.  "Webster  defines  paper 
money  as  "  Notes  or  'bills  issued  by  authority  and 
promising  the  payment  of  money,  circulated  as  the 
representative  of  coin."  In  mercantile  language  a 
bill  is  said  to  be  "  redeemable  "  when  the  drawer  is 
ready  to  pay  it.  It  is  notorious  that  the  bills  in 
question  answered  to  the  above  definition,  and  that 
the  Treasury  was  not  ready  then,  and  is  not  ready  yet, 
to  pay  them.  Therefore,  to  take  the  ground  that 
they  were  neither  "  paper  money  "  nor  "  irredeem 
able  "  is  not  to  defend  them,  but  to  attack  the 


/ 


90  LEGAL   TENDER   NOTES. 

definitions  of  Webster,  and  the  common  forms  of 
speech  used  by  the  business  world. 

It  is  proposed  to  examine  the  notes  thus  author- 
ized  from  three  distinct  standpoints. 

In  the  present  chapter  attention  will  be  called  to 
the  principles  involved  in  the  measure,  and  the 
effect  on  the  public  credit  of  the  adoption  of  such 
principles. 

Next,  we  shall  examine  into  the  effects  on  the 
business  and  other  interests  of  the  country. 

Finally,  to  judge  whether  the  system  devised 
was  really  the  best  one,  we  shall  inquire  how  far 
the  notes  were  expedient  and  necessary  ;  compare 
them  with  previous  systems  of  paper  currency, 
such  as  our  Continental  money,  and  the  assign  ats  of 
the  French  revolution  ;  and  examine  the  arguments 
urged  in  their  favor. 

The  object  of  the  measure  was  _two  jfold  :  it 
was  intended  to  alleviate  the  burden  of  the  debt 
already  contracted,  and  to  pay  certain  of  the  fu 
ture  expenses  of  the  war.  First  let  us  see  how  the 
former  object  was  attained.  There  were  notes  in 
circulation,  issued  by  authority  of  Congress,  to  the 
amount  of  some  $35,000,000  each  bearing  the 
words  "  THE  UNITED  STATES  WILL  PAY  THE  BEAK 
ER  -  DOLLARS  ON  DEMAND."  The  United  States 
had  not,  at  the  moment,  the  necessary  number  of 
dollars  to  pay  with.  So  the  "  bearers  "  were  met 
and  checkmated  by  a  timely  revision  of  the  Dic 
tionary. 


LEGAL   TENDER  NOTES.  91 

If  men  had  examined  the  acts  of  Congress  with 
a  view  of  learning  exactly  what  was  the  legal  mean 
ing  of  the  word  "  dollars  "  in  the  promise  "  will 

pay  the  bearer dollars,"  he  would  have  found  it 

to  be  as  follows  : 

DOLLAR.  A  coin  of  the  United  States  contain 
ing  23  T\  grains  of  fine  gold. 

These  thirty  five  millions  of  dollars,  therefore, 
meant  more  than  eight  hundred  million  grains  of 
gold.  Coiild  not  the  meaning  of  the  word  "  dollar  " 
be  so  altered  as  to  include  something  more  easily 
commanded  than  gold?  "Without  discussing  the 
legal  question  whether  it  could  be  so  altered  or  not, 
the  historical  fact  is  that  it  was  so  altered.  It  was 
made  to  read : 

DOLLAR.  A  piece  of  paper  stamped  "  United 
States  will  pay  one  dollar. — Legal  tender  for  one 
dollar : "  etc. 

Since  these  pieces  of  paper  could  be  command 
ed  at  a  very  small  cost,  it  is  obvious  that  there  was 
a  great  saving  and  a  great  relief  at  least  for  the 
time  being.  As  soon  as  the  plates  could  be  en 
graved,  and  the  printing  presses  be  put  in  success 
ful  operation,  the  Treasury  was  prepared  to  fulfil 
the  promise,  "  United  States  will  pay  the  bearer  - 
dollars."  So  whenever  the  holder  of  a  demand  note 
thereafter  presented  it  at  the  Treasury  and  persisted 
in  demanding  payment,  he  reqelved  another  note, 
with  the  words  "on  demand  "  left  oft',  and  the  debt 
was  for  the  time  being  discharged. 


92  LEGAL  TENDER  NOTES. 

It  was  not  the  demand  notes  alone  that  were 
thus  provided  for.  The  new  paper  money  was  a 
legal  tender  in  payment  of  the  entirejgm?^2^Lof 
the  public  debt.  How  would  this  operate  ?  In  the 
course  of  the  preceding  twelve  months,  when  twen 
ty  mil]  ions  of  hearts  were  all  aglow  with  enthusi 
asm  for  their  flag  and  their  country,  thousands  of 
old  stockings  in  every  State  had  poured  their  gold 
en  contents  into  the  treasury  of  the  nation.  Thou 
sands  of  mechanics,  farmers,  and  workmen,  each 
gave  a  hard-earned  hundred  of  gold  dollars  to  sup 
port  the  credit  of  the  Government.  They  received 
in  return  7fV  notes;  promises  that  the  United 
States  would  repay  them  the  "dollars"  in  three 
years.  The  new  definition  of  dollar  was  applied  to 
the  entire*  principal  of  these  notes  also.  It  was 
enacted  that  when  the  holder  of  the  7-30  note  pre 
sented  it  at  the  Treasury  for  payment,  instead  of 
getting  his  gold  dollars  back,  he  should  be  paid  in 
dollars  wrhich  were  obtained  by  the  Government  at 
the  cost  of  paper  and  printing  unless  he  preferred  a 
six  per  cent.  bond.  The  promise  to  pay  would  be 
legally  cancelled  by  the  delivery  of  another  promise 
to  pay. 

Now  let  us  consider  an  ethical  question.  Why 
might  not  Congress  have  enacted  as  follows : 

That  the  notes  known  as  seven-thirties  shall, 
after  they  become  due,  he  a  legal  tender  for  aH 
debts  public  and  private,  when  so  stamped  at  the 
Treasury  f 


LEGAL   TEXDEK   NOTES.  93 

Then,  when  the  holder  of  the  note  presented  it 
for  payment,  the  teller  would  simply  stamp  it 
"  Legal  Tender,"  and  hand  it  back,  and  the  debt 
would  be  paid.  Would  it  not  have  been  just  as 
satisfactory  to  the  creditor  to  be  paid  in  this  way  as 
to  be  paid  in  a  new  note  ?  It  certainly  would. 
The  old  note  stamped  would  have  been  legal  tender 
equally  with  the  new  one  ;  and  it  was  just  as  easy  as 
not  to  give  it  all  the  elements  of  value  of  the  new 

>  <3 

note  by  receiving  it  in  payment  of  debts  and  loans. 
In  fact,  a  law  was  actually  passed  which  per 
mitted  the  demand  notes  to  be  redeemed  in  this 
way.  They  also  were  declared  a  legal  tender  in 
payment  of  debts.  Consequently,  when  the  bearer 
of  the  note  presented  it  for  payment,  the  teller 
could  pay  it  by  handing  back  either  the  identical 
note  presented,  or  another  one  exactly  like  it,  with 
out  even  the  trouble  of  stamping.  Quite  likely 
this  formality  was  not  actually  gone  thro  ugh  with  in 
a  single  case ;  more_especially  as  the  old  demand 
notes,  being  receivable  for  customs,  were  rnorU'Talu* 

have  been  equally  aTTiBeftylO  rgflge'm  themT  Con 
sequently,  it  would  have  been  to  the  positive  injury 
of  the  note  holder  to  allow  the  Government  to  re 
deem  its  promise  in  the  altered  way. 

This  ethical  question  gives  rise  to  a  few  others. 
They  are  not  asked  in  a  spirit  of  censoriousness, 
nor  with  the  idea  of  intimating  that  there  can  be 
but  one  answer  to  them ;  but  simply  to  induce  the 


94  LEGAL   TENDEK   NOTES. 

reader  to  study  the  subject  from  an  ethical  point  of 
view.  Was  the  operation  we  have  described — that 
of  paying  one  note  with  another — paying  the  debt 
expressed  by  the  first  note  ?  If  so,  was  it  paying 
the  debt  in  the  manner  understood  between  the 
parties  at  the  time  the  debt  was  contracted  ?  If 
not,  what  is  the  "  dishonored  public  faith "  and 
"  national  bankruptcy "  of  which  Mr.  Chase  so 
emphatically  warned  Congress  not  three  months 
before  ? 

~No  elaborate  argument  can  be  necessary  to 
make  it  obvious  to  any  unprejudiced  mind,  that 
such  measures  as  have  been  described  could  not  be 
otherwise  than  most  injurious  to  the  credit  of  the 
Government.  That  promises  made  by  the  Govern 
ment  were  modified  without  the  consent  of  the 
party  in  whose  favor  they  were  made,  is  undeniable. 
The  promise  meant  one  thing  at 'the  time  it  was 
made ;  the  meaning  of  the  words  was  afterwards 
changed  so  that  it  should  mean  something  else. 
Gold  had  been  the  only  legal  tender  of  the  Govern 
ment  since  the  adoption  of  the  Constitution.  For 
the  first  hundred  million  of  the  7-30  notes  it  would 
accept  nothing  but  gold,  or  its  absolute  equivalent. 
Among  those  who  thus  loaned  the  metal  gold  to 
the  Government,  no  one  for  a  moment  supposed 
that  if  the  loan  were  ever  repaid  at  all,  it  would  be 
repaid  in  any  thing  but  gold. 

It  would  be  entirely  useless  to  inquire  whether 
the  measure  in  question  was  a  breach  of  public 


LEGAL   TENDER  NOTES.  95 

faith.  If  every  citizen  of  the  country,  and  every 
holder  of  bonds,  were  to  believe  and  maintain  that 
the  act  was  perfectly  right,  it  would  not  prevent  the 
evil  effects  in  the  least,  but  only  exaggerate  them.  The 
relatioi*  of  cause  and  effect  is  as  invariable  in  the 
world  of  mind  as  it  is  in  the  world  of  matter.  "We 
need  not  decide  whether  a  moral  cause  is  right  or 
wrong  in  order  to  trace  it  to  its  consequences.  If 
the  effects  of  the  legal  tender  notes  depended  on  the 
purity  of  the  motives  of  our  statesmen  in  issuing 
them,  they  would  undoubtedly  be  good.  But  such 
is  not  the  case.  In  so  far  as  the  effects  are  bad,  the 
adoption  of  the  measure  was  like  setting  fire  to  a 
wooden  house.  The  house  will  burn  down  equally 
whether  the  act  of  setting  it  on  fire  was  right  or 
wrong,  necessary  or  unnecessary. 

On  the  very  same  principles  Great  Britain 
could  relieve  herself  of  the  burden  of  her  entire 
public  debt  in  a  single  month  by  ordering  an  issue 
to  the  public  creditors  of  legal  tender  notes  for  the 
debt  as  fast  as  it  became  payable.  Perhaps  if  we 
cannot  see  the  beam  in  our  own  eye,  we  may  never 
theless  see  the  mote  in  our  neighbor's  eye,  and 
divine  the  effect  of  such  a  measure  on  the  public 
credit  of  the  British  Empire,  whether  the  measure 
itself  should  be  necessary  or  unnecessary.  Indeed 
.a  Government  could  in  the  very  same  way  make  its 
contracts  mean  any  thing  it  pleased  by  altering  the 
legal  meaning  of  the  words  which  entered  into 
them. 


96  LEGAL   TENDER   NOTES. 

In  our  own  case  the  change  would  have  been 
less  to  the  disadvantage  of  the  bondholder,  had  any 
efficient  measures  been  taken  to  give  the  legal 
tender  money  a  definite  gold  value.  It  may  be 
replied  that  three  measures  were  taken  to  this  end : 

1.  The  notes  were  declared  lawful  money  and 
legal  tender. 

2.  They  were  redeemable,  not  directly  in  coin, 
but  in  the  class  of  securities  familiarly  known  as 
"five-twenty  bonds." 

3.  They  are  themselves  part  of  the  public  debt, 
inasmuch  as  each  note  contains  a  promise  that  the 
United  States  will  pay  the  bearer  the  amount  of  its 
face. 

Perhaps  it  is  hardly  necessary  to  argue  the  first 
point.  'No  Government  was  ever  powerful  enough 
to  compel  its  paper  money  to  be  considered  as  the 
equivalent  of  coin,  for  this  would  be  to  control  the 
most  secret  thoughts  and  opinions  of  men.  What 
ever  might  have  been  thought  of  the  case  in  the 
beginning,  few  will  now  pretend  that  our  paper  dol 
lars  are  in  any  way  the  equivalent  of  the  gold  dollars 
which  could  be  legally  demanded  for  every  debt 
previous  to  Feb.  25, 1862.  Let  us  look  at  the  ques 
tion  in  a  general  light.  Why  should  a  note  stamped 
by  authority  of  the  Government  "  Legal  tender  for 
one  dollar,"  be  worth  twenty-three  grains  of  gold 
rather  than  five  grains  or  one  grain  ?  Why  should  it 
be  worth  our  gold  dollar  rather  than  a  German  thaler  ? 
I  can  see  no  reason.  Making  the  notes  legal  tender 


LEGAL   TENDEE    NOTES.  97 

adds  nothing  to  their  value.  You  can,  indeed,  pay 
off  an  old  debt  with  them  as  -with  gold,  because  the 
creditor  cannot  help  himself;  but  when  you  come  to 
buy  flour  and  butter,  you  find  the  holders  graduate 
their  prices  to  correspond  to  the  new  value  of  the 
dollar.  You  find  that  although  Congress  can  de 
clare  notes  legal  tender,  it  cannot  fix  the  price  of 
provisions. 

2.  The  legal  tender  notes  now  issued  are  not  re 
deemable  in  five-twenties  or  any  other  specified  form 
of  security.  They  are,  indeed,  receivable  for  all 
loans ;  but  as  the  loans  can  be  negotiated  only  on 
such  terms  as  the  Government  chooses  to  accede  to, 
this  adds  nothing  to  the  value  of  .the  notes.  The 
first  issue  of  notes  was  redeemable  in  the  bonds  al 
luded  to.  Hence  their  value  could  not  fall  below 
that  of  the  bonds,  for  wThich  they  could  at  any  time 
be  exchanged.  But  how  was  the  value  of  the 
bonds  fixed  ?  By  the  terms  of  the  legal  tender  act 
the  Government  could  redeem  the  bonds  at  any 
time  after  five  years  in  legal  tender  notes.  The 
value  of  the  bonds  was  therefore  fixed  by  the  value 
of  the  future  legal  tender  notes,  which  might  be 
much  less  than  that  of  the  present  ones.  There  was 
no  promise  or  pledge,  expressed  or  implied,  that  the 
money  with  which  the  principal  should  be  discharg 
ed  should  have  any  intrinsic  value  whatever. 
There  was,  indeed,  no  doubt  that  it  would  be  dis 
charged  in  something  which  would  be  declared  law 
ful  money  by  Act  of  Congress ;  but  what  one  hun- 
5 


98  LEGAL   TENDER   NOTES. 

dred  dollars  of  this  money,  when  received,  would  be 
worth,  no  man  in  the  country  knew  then ;  no  man 
in  the  country  knows  now.  They  may  be  paid  in 
gold,  in  lawful  money  the  equivalent  of  gold,  or  in 
lawful  money  one  thousand  dollars  of  which  will 
not  buy  a  barrel  of  flour,  without  any  breach  of 
promise  on  the  part  of  the  Government. 

Had  the  faith  of  the  nation  been  unequivocably 
pledged  that  both  principal  and  interest  of  the  new 
bonds  should  be  paid  in  coin  of  the  same  weight 
and  standard  as  that  already  authorized  by  law ; 
had  the  national  legislature  likewise  declared,  that 
the  sense  of  the  country  demanded  that  every  obli 
gation  into  which  the  Government  had  previously 
entered  should  be  discharged  exactly  as  was  under 
stood  at  the  time  of  entering ;  had  they  in  conse 
quence  provided  for  the  payment  of  the  demand 
notes  and  the  "  seven-thirties  "  in  coin,  the  former 
immediately,  the  latter  at  maturity ;  then,  I  can 
scarcely  conceive  that  the  bonds  in  question  could 
have  fallen  very  much  below  gold.  But  whether 
this  idea  is  correct  or  not,  whether  the  measures  pro 
posed  would  or  would  not  have  given  a  great 
impulse  to  public  credit,  it  is.  certain  that,  as  the 
case  stood,  no  definite  value  could  be  assigned  to 
the  money  in  which  the  principal  of  the  bonds 
might  be  paid.  Making  notes  redeemable  in  bonds 
which  were  again  redeemable  in  notes,  was  like 
trying  to  keep  a  ship  from  blowing  to  sea  by  lashing 
her  to  another,  and  then  anchoring  this  one  by  lashing 
her  to  the  first. 


LEGAL   TE]STDER   NOTES.  99 

The  interest  of  the  public  debt  was  excepted 
from  the  operation  of  the  legal  tender  act.  This 
was  the  great  redeeming  feature  of  the  bill.  But 
for  it,  our  currency  might  now  be  rapidly  following 
our  Continental  money,  and  the  present  currency  of 
the  rebels,  in  the  road  to  ruin.  But  a  great  part  of 
the  good  effect  which  might  have  resulted  from 
this  proviso,  was  lost  from  the  circumstance  that 
there  was  no  pledge  of  faith  to  continue  paying  the 
interest  in  coin  for  any  specified  length  of  time. 
The  bill  simply  enacted  that  the  notes  should  be 
lawful  money,  and  a  legal  tender  in  payment  of  all 
debts  except  duties  on  imports  and  interest  on  the 
public  debt,  which  should  be  paid  in  coin.  There 
would  certainly  have  been  no  greater  breach  of 
faith  in  including  the  interest  of  the  debt  in  the  op 
eration  of  the  law  than  in  including  the  principal ; 
and  if  one  Congress  can  declare  paper  a  legal 
tender  for  one  debt,  the  next  Congress  can  declare 
it  legal  tender  for  another.  At  the  same  time  every 
enlightened  friend  of  the  credit  of  the  country 
cannot  but  earnestly  hope  that  the  interest  on  the 
present  funded  debt  will  never  be  paid  in  any  thing 
but  coin  of  the  present  standard. 

3.  The  legal  tender  notes  are,  indeed,  counted  as 
part  of  the  public  debt,  but  the  time  when  this  debt 
is  to  be  paid  is  entirely  unknown.  Equally  un 
known  is  the  kind  or  value  of  the  money  in  which 
it  is  to  be  paid.  If  it  is  not  to  be  paid  for  a  century 
its  present  value  as  a  debt  is  very  inconsiderable. 


100  LEGAL   TENDER   NOTES. 

Indeed,  so  long  as  the  present  law  is  in  force,  every 
note  would  seem  to  be  virtually  legal  tender  for  its 
own  payment.  "Whenever  it  is  presented  at  the 
Treasury,  it  can  be  legally  redeemed  in  another  note 
just  like  it  ,and  this  second  note  can  be  redeemed  by 
returning  the  first.  So  the  note  has  not  necessa 
rily  any  value  at  all  as  a  Government  debt. 

It  is,  then,  quite  plain  that  there  was  110  neces 
sary  limit  to  the  possible  depreciation  of  the  new 
notes.  But  the  circumstance  that  a  fixed  gold 
value  was  not  given  to  the  notes,  is  not  of  itself  the 
great  evil  to  be  complained  of. 

We  may  say  of  every  act  of  a  Government  or 
an  individual,  that  it  involves  and  is  founded  on 
some  principle,  and  some  general  rule  of  conduct. 
In  many  cases  the  principles  involved  in  the  act  are 
really  of  much  more  importance  than  the  act  itself, 
because  they  may  be  the  occasion  of  a  long  series 
of  analogous  acts.  If  a  trader  makes  false  repre 
sentations  in  the  sale  of  goods,  the  general  fact  that 
he  cannot  be  trusted  is  of  far  greater  importance 
than  the  particular  fact  that  on  such  a  day  he 
cheated  you.  The  evil  of  an  unjust  imprisonment 
is  not  that  Mr.  A  or  Mr.  B  has  been  deprived  of  liber 
ty  for  a  few  hours,  but  that  a  principle  has  been  estab 
lished  under  the  operation  of  which  personal  liberty 
is  110  longer  secure. 

So  with  the  measures  under  consideration ; 
their  real  evil  lay,  not  in  the  inception  of  a  fact,  but 
in  the  establishment  of  a  principle.  It  was  not 


LEGAL   TENDER   NOTES.  101 

that  we  declared  paper  a  legal  tender,  but  that 
we  adopted  a  rule  of  action  under  the  operation 
of  which  public  credit  was  but  an  empty  sound.  It 
was  not  that  the  Treasury  happened  to  be  in  a  strait 
for  money,  but  that  it  pretended  to  pay  when  it  did 
not.  The  fact  that  the  measure  was  accepted  by  the 
country  as  a  just  and  proper  one  made  the  matter 
worse,  because  tRe  sanction  of  public  opinion  was 
thus  given  to  a  ruinous  principle,  and  the  principle 
was,  for  this  reason,  more  likely  to  become  a  stand 
ard  policy.  On  the  other  hand,  the  more  unfavor 
able  the  light  in  which  the  public  view  the  measure ; 
the  more  they  reprobate  the  principles  involved  in 
it ;  and  the  less  they  are  disposed  to  justify  them  or 
accept  them  as  the  basis  of  a  permanent  policy,  the 
better.  For  the  credit  of  a  people  will  always  cor 
respond  to  their  standard  of  public  honesty  as  indi 
cated  by  their  acts  and  opinions.  Consequently, 
whenever  the  nation  clearly  sees  that  measures 
injurious  to  the  public  credit  are  fundamentally 
wrong,  and  manifests  a  desire  to  repudiate  or  mod 
ify  them  at  the  earliest  moment,  its  credit  will  by 
the  general  recognition  of  that  state  of  feeling  be 
restored.  The  nation  as  a  seeker  of  credit  is  in  the 
position  of  an  individual,  against  whom  payment 
can  be  enforced  by  no  law  except  his  own  sense  of 
justice.  It  is  more  important  that  his  sense  of 
justice  shall  be  correct  and  delicate,  than  that  he  shall 
have  ready  money. 

The  legal  tender  notes  naturally  grew  out  of  the 


102  LEGAL   TENDER   NOTES. 

suspension  of  specie  payments  by  the  treasury  two 
months  before.  Considering  only  the  present  exi 
gencies  of  the  Government,  the  views  which  our 
people  had  been  accustomed  to  entertain  respecting 
the  extent  of  the  obligation  to  pay  a  circulating 
note,  and  the  general  practice  of  the  banks  through 
out  the  country,  this  act  was  a  comparatively  harm 
less,  and  veiy  necessary  one.  But*let  us  measure  it 
by  that  high  standard  of  faith  which  ought  to  be 
adopted  by  the  statesman  who  desires  to  see  his 
generation  bequeath  an  untarnished  honor  to  poster- 
ity. 

Let  us  see  how  it  would  be  with  individuals 
placed  in  circumstances  similar  to  those  of  the  Gov 
ernment,  in  the  first  part  of  1862.  A  creditor  holds 
notes  against  such  a  person.  He  demands  payment, 
and  the  following  conversation  ensues : 

Debtor.  Cannot  pay  it.  I  have  not  money 
enough  to  pay  all  notes  of  that  kind,  so  to  be 
impartial  I  shall  not  pay  any.  The  banks  have  sus 
pended,  and  so  have  I. 

Creditor.  When  can  you  pay  it  ? 

Debtor.  Don't  know :  cannot  answer  any  more 
questions. 

This  was  no  doubt  the  substance  of  the  conver 
sation  between  the  teller  and  every  one  who  pre 
sented  a  note  at  the  Treasury  between  the  suspension 
of  specie  payments  and  the  issue  of  the  legal  tend 
er  notes.  Not  only  the  obligation  to  pay  on  demand, 
but,  so  far  as  the  public  could  discern,  all  obliga- 


LEGAL   TENDER   NOTES.  103 

tion  to  pay  at  all  until  the  holder  should  chance  to 
owe  an  equal  debt  to  the  Government,  was  deliber 
ately  repudiated.  This  weak,  timeserving,  and 
timid  act  is  a  principal  link  in  the  chain  which  has 
brought  on  all  our  subsequent  difficulties.  No  man 
who  believes  that  honesty  is  the  best  policy,  that  a 
nation  as  well  as  an  individual  in  search  of  credit, 
should  exhibit  the  most  scrupulous  honor  in  fulfil 
ling  all  obligations,  can  doubt  that  the  counsels  which 
suggested  this  course  were  the  very  worst  that  could 
be  adopted.  It  was  a  critical  period  in  our  financial 
history.  Fear  and  confidence  fought  for  the  mas 
tery  in  the  minds  of  the  community.  Had  the 
Treasury  allied  itself  with  the  side  of  confidence  by 
resolutely  continuing  specie  payments,  it  might  have 
prevailed.  The  suspension,  except  during  the  short 
time  necessary  to  negotiate  a  temporary  loan,  was  as 
unnecessary  and  unjustifiable  as  it  was  weak.  A 
heavy  tax,  say  six  per  cent,  per  annum,  on  the  repu 
diated  bank  circulation,  would  of  itself  have  stopped 
the  run  on  the  Treasury  in  forty-eight  hours  after  it 
was  imposed.  The  banks  would  then  have  called 
in  their  notes  as  rapidly  as  possible,  and  there  would 
have  been  a  positive  necessity  for  either  gold,  de 
mand  notes,  or  other  Government  money  to  fill  the 
vacuum.  No  doubt  such  a  measure  would  have 
seemed  harsh  and  ungrateful,  and  would  have  caused 
much  complaint  on  the  part  of  the  banks.  But, 
which  is  of  most  importance,  the  honor  of  the  Gov 
ernment  and  the  moral  stamina  of  the  nation,  or 


104  LEGAL  TENDER  NOTES. 

the  interest  of  those  corporations  ?  It  must  be  re 
membered  that  such  a  tax  would  only  have  deprived 
the  banks  of  a  source  of  profit  to  which  the  Gov 
ernment  has  a  far  better  right  than  they ;  namely, 
the  interest  on  the  money  circulating  through  the 
channels  of  business.  Indeed,  as  we  shall  see  in  the 
next  chapter,  the  course  actually  pursued  has  been 
far  more  disastrous  to  the  bank  interests  than  would 
have  been  a  compulsory  prohibition  of  all  their 
business. 

It  may  not  be  uninteresting  to  examine  more 
fully  that  state  of  public  sentiment  which  led  the 
nation  to  look  with  so  little  dissatisfaction  upon  the 
act  in  question. 

The  general  complacence  with  which  our  mer 
cantile  community  look  upon  the  failure  of  a  house 
to  make  good  its  obligations,  the  frequency  of  such 
failures,  and  the  circumstance  that  they  are  not 
looked  upon  as  compromising  the  honor  of  the  de 
faulters  in  any  degree  whatever,  have  been  thrown 
into  our  faces  by  our  transatlantic  brethren  as  indi 
cative  of  our  very  lax  notions  of  public  morality. 
The  imputation  is  neither  just  nor  reasonable,  so 
long  as  good  faith  is  kept  between  the  parties. 
"When  one  merchant  gives  credit  to  another,  or  fur 
nishes  a  young  man  with  a  stock  in  trade,  it  is  done 
with  the  tacit  understanding  that  the  obligation  of 
the  debtor  ceases,  if,  through  losses  in  business,  he 
becomes  unable  to  pay.  The  creditor  of  course 
charges  a  little  more  on  account  of  the  risk ;  he  in- 


LEGAL   TENDEJB   NOTES.  105 

sures  the  debt  as  an  insurance  company  would  insure 
a  house,  and  it  may  be  that  this  system  of  debt  in 
surance  is  as  beneficial  to  the  community  as  fire 
insurance.  It  certainly  is  as  honest. 

But  when  we  extend  this  system  of  debt  insur 
ance  into  transactions  of  a  public  character  we  start 
on  the  road  to  infinite,  evil.  The  frequency  with 
which  our  banks  have  for  a  longer  or  shorter  period 
suspended  specie  payments  has  habituated  the  pub 
lic  to  read  every  bank  note  with  the  mental  reserva 
tion  "  if  we  do  not  suspend,"  just  as  every  promisso 
ry  note  contained  the  understood  proviso  "  if  I  am 
able."  Now,  the  question  arises,  ought  this,  or  any 
other  proviso  to  le  understood  as  qualifying  the 
promises  to  pay  of  our  Government  f  Most  cer 
tainly  not,  except  as  circumstances  absolutely  be 
yond  the  control  of  the  Treasury  might  temporarily 
compel  it.  Absolute  inability  of  the  nation  to 
redeem  its  obligations  to  its  own  citizens  is  almost  a 
physical  impossibility.  For,  as  has  been  shown  in 
the  last  chapter,  paying  such  a  debt  is  nothing  more 
than  equalizing  the  unequal  contributions  of  indi 
vidual  citizens,  so  that  each  one  shall  have  contribut 
ed  his  just  share. 

The  evils  of  the  Treasury  suspension  were 
greater  than  those  involved  in  the  suspension  of  the 
banks,  owing  to  the  different  conditions  of  the  two 
institutions.  A  well-managed  bank  always  holds  in 
its  vaults  either  coin  or  promissory  notes  of  respon 
sible  individuals  sufficient  to  pay  all  demands  upon 
5* 


106  LEGAL   TENDER   NOTES. 

it,  and  to  make  good  its  capital  beside.  All  these 
notes  would  be  due  in  less  than  ninety  and  perhaps 
less  than  sixty  days,  depending  on  the  length  of 
time  of  discount.  The  Government,  on  the  other 
hand,  held  no  such  notes,  and  payment  would  have 
to  be  left  entirely  to  its  sense  of  good  faith.  Hence 
the  more  disastrous  consequences  of  its  refusal  to 
pay  as  promised.  But  the  G  overnment  had  a  power 
which  the  banks  had  not,  that  of  levying  taxes  to 
any  extent  on  the  whole  country,  so  that  its  failure 
could  be  due  only  to  its  own  supineness. 

But  failing  to  see  any  more  serious  consequences 
in  the  Treasury  suspension  than  in  the  bank  suspen 
sions,  the  nation  supinely  submitted  to  it,  as  some 
thing  which  could  not  be  helped,  and  which  did  not 
involve  any  degradation  of  the  public  faith.  The 
credit  of  the  banks  had  not  generally  been  impaired 
by  their  suspension,  or  by  the  general  expectation 
of  such  an  act.  Why  should  that  of  the  Govern 
ment  ?  So,  notwithstanding  the  fear  of  the  people 
exhibited  by  the  Treasury,  and  notwithstanding  the 
vote  of  want  of  confidence  in  the  nation  implied  in 
the  legal  tender  bill,  which  two  months  after  the 
suspension  protected  the  Treasury  against  the  as 
saults  of  its  creditors  by  surrounding  it  with  a  par 
apet  of  legal  tender  paper,  the  confidence  of  the 
nation  was  not  at  first  impaired.  This  is  conclu 
sively  proved  by  the  gold  value  of  the  National 
bonds.  The  twenty-year  sixes,  a  month  after  the 
passage  of  the  act,  brought  96  in  gold,  showing  con- 


LEGAL  TENDER  NOTES.  107 

clusively  that  the  people  had  no  idea  that  the  prin 
ciples  involved  in  the  recent  acts  would  be  carried 
out  to  their  legitimate  conclusion.  The  evils  of  a 
redundant  currency  had  just  been  so  clearly  depict 
ed  by  the  Honorable  Secretary  of  the  Treasury, 
and  the  general  determination  to  sustain  the  credit 
of  the  nation  was  so  strong,  that  every  one  felt  con 
fident  that  efficient  measures  would  be  taken  to 
guard  the  currency  against  serious  depreciation. 
Had  any  one  predicted  that  in  three  years  the  notes 
which  were  declared  a  legal  tender  for  the  entire  prin 
cipal  of  the  public  debt,  would  only  have  been  worth 
from  40  to  45  cents  on  the  dollar  in  gold,  he  would 
have  been  looked  upon  as  a  villanous  slanderer  of 
the  public  credit. 

Yet  their  history  exhibits  the  same  characteristics 
which  have  been  exhibited  by  every  system  of  paper 
money  not  redeemable  in  coin.  The  magic  word 
"  dollar "  had  at  first  a  great  influence  over  the 
minds  of  the  community.  Value  being  something 
which  could  not  be  seen,  felt,  or  heard,  but  only 
learned  from  the  exhibition  of  public  demand  in 
the  market,  it  was  thought  that  any  thing  declared 
a  dollar  by  act  of  Congress  must  be  as  valuable  as 
any  thing  which  had  formerly  been  declared  a  dol 
lar.  But,  as  additional  issues  of  legal  tender  paper 
began  to  be  emitted  or  called  for,  as  these  issues 
began  to  be  recommended  on  the  miserable  plea  of 
their  necessity,  as  men  began  to  see  that  this  paper 
money  had  absolutely  no  fixed  basis  of  value  what- 


108 


LEGAL   TENDER   NOTES. 


ever,  and  that  there  was  no  apparent  disposition  on 
the  part  of  the  Government  to  form  any  such  basis 
for  it ;  then  the  prices  of  things  began  to  rise,  and 
gold  to  rise  with  them. 

The  actual  cause  of  public  credit,  as  a  matter  of 
fact,  not  of  theory,  as  it  existed  in  the  minds  of  the 
community,  not  in  the  speeches  of  politicians,  is 
shown  by  the  following  table.  This  shows  for  each 
month — 1.  The  average  price  of  gold  in  legal  tender 
notes  ;  2.  The  value  in  gold  of  $100  in  legal  tender 
notes ;  3.  The  market  value  in  gold  of  6  per  cent, 
bonds,  accrued  interest  for  the  half  year  taken 
off. 


1862. 


1863. 


March 
April  ..... 

May  ...... 

June  ..... 

July  ...... 

August  .  .  . 
September. 
October  .  .  . 
November. 
December  . 
January.  .  . 
February  .  . 
March 
April  ..... 


June  ..... 
July  ..... 

August  .  .  . 
September 
October  .  .  . 
November  . 
December  . 


Price  of 
Gold. 


1.02 
1.02 
1.03 
1.06 
1.16 
1.15 
1.19 
1.30 
1.31 
1.32 
1.44 
1.61 
1.51 
1.51 
1.48 
1.46 
1.31 
1.26 
1.33 
1.46 
1.47 
1.52 


Gold  value 

Gold  value  of 

of  $100  in 
legal  tender 

$100  20-years 
6  per  cent. 

notes. 

bond. 

98 

90 

98 

91 

97 

99 

94 

98 

86 

86 

87 

87 

84 

84 

77 

79 

76 

78 

76 

76 

70 

67 

62 

60 

66 

67 

66 

68 

68 

72 

69 

73 

76 

80 

79 

83 

75 

79 

69 

74 

68 

73 

66 

70 

LEGAL  TENDER  NOTES.  109 

Gold  value  Gold  value  of 

Price  of         of  $100  in  $100  20-ycara 
Gold.       .    legal  tender         6  per  cent, 
notes.  bond. 

1864     January 1.54  65  69 

February 1.60  63  69 

March 1.64  61  67 

April 1.75  67  61 

May 1.80  56  62 

June 1.95  51  54 

July 2.50  40  42 

August 2.56  39  41 

September 2.28.  44  47 

October 2.06  49  51 

November 2.24  45  48 

December 2.30  44  48 

The  two  last  columns  of  this  table,  which  show 
the  actual  gold  value  at  which  the  Government 
notes  and  bonds  have  been  held,  is  worthy  of  very 
serious  attention.  Whatever  metaphysical  themes 
may  be  propounded  about  the  demonetization  of 
gold,  and  its  conversion  into  an  article  of  merchan 
dise,  the  following  three  facts  are  thoroughly  under 
stood  by  the  mercantile  community  : 

1.  Gold  and  silver  have  for  centuries  been  the 
standard  of  value  in  every  civilized  country. 

2.  Gold  now  is  the  standard  of  value  in  our  own 
as  in  every  other  civilized  country,  in  spite  of  the 
legal  tender  paper. 

3.  Gold  will  be  the  standard  of  value  in  this 
and  every  other  civilized  country,  in  spite  of  any 
thing  any  Government  may  do  to  prevent  it.* 

*  The  fact  that  prices  in  general  do  not  fluctuate  in  exact  corre 
spondence  with  gold,  no  more  disproves  these  general  propositions 
than  the  existence  of  mountains  disproves  the  rotundity  of  the 
earth. 


110  LEGAL   TENDER   NOTES. 

These  unchangeable  facts  being  taken  for  grant 
ed,  does  the  circumstance  that  our  six  per  cent, 
bonds,  in  the  public  market,  will  only  bring  fifty 
cents  on  the  dollar  in  coin,  imply  any  doubt  of  the 
Government  faith  ?  This  depends,  in  part,  on  what 
standard  of  credit  the  Government  is  supposed  to 
adopt.  If  legal  tender  notes  are  to  be  the  perma 
nent  Government  currency,  its  credit  in  this  respect 
is  very  good  ;  indeed  all  that  can  be  desired,  and 
more  than  could  be  expected,  showing  most  conclu 
sively  that  the  people  look  forward  to  some  better 
standard  than  that.  If  the  bonds  are  to  be  consid 
ered  as  redeemable  in  paper,  it  is  as  absurd  to  meas 
ure  them  by  a  gold  standard  as  it  would  be  to  as 
sume  that  a  dollar  meant  a  pound  sterling.  In  fact, 
in  the  case  supposed  it  is  impossible  to  fix  any  gold 
value  for  the  bonds,  because  no  one  can  predict  the 
gold  value  of  future  legal  tender  notes.  It  is  as  if 
you  held  a  note  against  an  individual  for  100  pias 
tres,  when  neither  he  nor  you  knew  how  much  a 
piastre  was  ;  when  no  one  knew,  in  fact,  because  its 
value  would  have  to  be  fixed  by  future  legislation. 
In  such  a  case  your  unwillingness  to  consider  the 
piastre  as  the  equivalent  of  the  gold  dollar  would 
not  involve  any  doubt  of  the  good  faith  of  the 
drawer  of  the  note. 

But,  if  both  principal  and  interest  of  the  debt 
are  to  be  paid  in  gold  coin,  our  public  credit  is  prac 
tically  not  good.  In  ordinary  times  five  per  cent, 
bonds  are  worth  par  in  our  markets.  True,  the 


LEGAL  TENDER  NOTES.  Ill 

effect  of  the  war  has  been  to  increase  the  rate  of 
profit  on  capital  for  the  time  being;  but  this  in 
crease  is  only  temporary,  so  that  a  seven  or  eight 
per  cent,  bond,  if  it  has  many  years  to  run,  ought  to 
be  worth  par,  and  probably  would  be  if  its  security 
were  perfect.  Since,  then,  our  six  per  cent,  bonds 
are  only  worth  about  50  in  gold  ;  since,  in  order  to 
borrow  the  equivalent  of  $100  in  coin,  wre  must  not 
only  pay  $12  per  annum  interest,  but  $200  for  prin 
cipal  at  maturity,  it  must  be  conceded  that  the  com 
munity  does  not  feel  universally  assured  of  receiving 
both  principal  and  interest  of  those  bonds  in  gold 
coin  of  the  present  standard.  If  any  additional 
proof  of  this  fact  is  wanting,  it  is  found  in  the  much 
higher  price  commanded  by  Massachusetts  bonds  of 
similar  character.  Why  are  Massachusetts  bonds 
preferred  to  those  of  the  United  States  ?  Let  our 
consciences  answer  this  question  for  us. 

TVhile  it  can  hardly  be  controverted  that  the  low 
gold  price  of  our  bonds  does  imply  some  doubt  of 
their  being  paid  in  gold,  we  cannot  measure  this 
doubt  by  the  amount  of  the  depreciation.  The  lat 
ter  depends  in  part  on  certain  attributes  of  human 
nature.  !S"o  man  will  give  any  thing  for  a  debt  not 
payable  until  twenty  years  have  elapsed,  unless  he 
takes  an  interest  in  his  future  self.  Now,  although 
to  a  certain  extent  most  civilized  men  are  disposed 
to  provide  for  the  far  future  as  carefully  as  for  the 
present,  this  disposition  speedily  finds  a  limit.  They 
are  quite  willing  to  invest  their  ordinary  surplus 


112  LEGAL   TENDER   NOTES. 

earnings  for  the  benefit  of  the  future.  But  when  it 
comes  to  making  those  unusual  exertions  necessary 
in  the  prosecution  of  a  great  war,  the  prospect  of 
future  pecuniary  benefit  speedily  loses  part  of  its 
hold  on  the  mind.  Men  will  want  larger  and  larger 
promises  to  stimulate  them  to  the  same  exertions,  no 
matter  how  certain  of  fulfilment  those  promises  may 
be.  Thus  a  great  depreciation  of  any  kind  of  bonds 
is  the  necessary  result  of  throwing  more  of  them  on 
the  market  than  will  absorb  the  ordinary  surplus 
earnings  of  that  class  of  the  commnity  who  consider 
them  perfectly  secure.  The  more  frugal  this  class, 
that  is,  the  more  willing  they  are  to  labor  and  exer 
cise  self-denial  for  a  future  good,  the  less  wrill  be  the 
depreciation  from  overloading  the  market. 

But  apart  from  all  questions  of  frugality  among 
the  people  and  right  principles  on  the  part  of  the 
Government,  a  diminution  of  the  gold  value  of  bonds 
is  the  necessary  result  of  an  issue  of  notes  in  pay 
ment  of  indebtedness.  Respecting  the  manner  in 
which  the  Government  will  discharge  its  debts,  we 
have  all  shades  of  opinion.  Many  are  fully  con 
vinced  that  its  every  promise  will  be  redeemed  in 
coin,  and  would  be  willing  to  give  par  in  gold  for 
six  per  cent,  bonds  if  they  could  not  get  them  any 
cheaper.  Now  let  us  see  how  paying  in  paper  has 
operated  on  this  class.  Let  us  take,  for  instance, 
the  7T3o  notes,  issued  in  1861.  There  are,  we  will 
suppose,  five  persons  of  equal  wealth,  each  of  whom 
would  have  paid  $100,  had  this  loan  been  assessed 


LEGAL  TENDER  NOTES.  113 

as  a  tax.  But  one  of  them,  being  a  firm  and  confi 
dent  believer  in  the  Government,  paid  the  share  of 
all  five,  by  loaning  the  Government  $500  for  three 
years,  thereby  rendering  the  tax,  for  the  time  being, 
unnecessary.  If,  now,  at  the  end  of  three  years,  the 
Government  determines  to  pay  off  this  debt  in  coin, 
it  simply  levies  a  direct  tax  equal  to  the  entire 
amount  of  the  loan,  receiving  the  7-fV  notes  in  pay 
ment  therefor.  The  confident  man  will  now  get 
$400  of  his  gold  back  again,  either  by  his  four 
neighbors  each  coming  to  buy  $100  of  his  loan  in 
order  to  pay  their  tax,  or  by  the  Government  pay 
ing  his  notes  in  gold.  The  debt  will  then  be  dis 
charged  by  the  equitable  division  of  its  burdens 
among  all,  as  it  ought  to  be.  The  confident  man, 
having  got  his  gold  back,  and  found  his  faith  in  the 
Government  vindicated,  will  be  willing  to  loan  the 
gold  to  the  Government  again  on  favorable  terms, 
and  the  gold  value  of  bonds  will  be  as  great  as  ever. 
But  by  failing  to  levy  this  tax,  and  compelling 
the  creditor  to  fund  his  debt,  we  place  it  out  of  his 
power  to  make  another  loan  to  tJie  Government,  no 
matter  how  little  his  good  opinion  of  the  public  faith 
may  have  been  shocked  by  the  failure  to  compel  an 
equitable  division  of  the  war  expense.  The  Govern 
ment  is,  therefore,  compelled  to  borrow  from  those 
who  have  less  faith  in  it  and  less  disposition  to  in 
vest  money  for  the  future.  Thus  the  measure  under 
consideration  necessarily  paralyzes  the  eiforts  of  those 
who  have  faith  in  the  Government,  and  compels  it 


LEGAL   TENDER  NOTES. 

to  resort  for  further  loans  to  those  who  doubt  whether 
it  will  make  good  its  promises. 

Is  it  not  a  short-sighted  policy  which  has  thus 
punished  our  friends,  and  played  into  the  hands  of 
our  enemies  ? 

A  system  of  paper  money  may  be  described,  in 
general,  as  a  convenient  device  for  throwing  the  en 
tire  "burden  of  an  extraordinary  expense  upon  that 
class  of  the  community  who  have  most  faith  in  the 
paper  money.  Such  a  system  necessarily  acts  in 
this  way.  It  was  so  in  the  revolutionary  war.  The 
tory,  who  had  no  faith  in  the  redemption  of  the 
money,  always  parted  with  what  he  received  as  soon 
as  possible,  by  purchasing  the  necessaries  of  life  from 
the  more  confident  patriots.  As  the  currency  de 
preciated  prices  rose,  and  the  tories,  having  thus  got 
a  large  portion  of  the  army  supplies  in  their  own 
possession,  charged  their  own  price  for  them.  Thus 
the  patriots  and  the  cause  lost,  and  the  tories  gained. 
The  first  bore  the  entire  burden,  the  last  none. 

The  uncertainty  which  hangs  over  the  real  value 
of  the  future  "  dollar  "  is  much  to  be  deplored.  At 
present  a  simple  promise  on  the  part  of  the  Govern 
ment  to  pay  $119  in  three  years,  being  principal 
and  interest  of  a  three  years'  compound  interest 
note,  will  only  bring  45  cents  in  gold  in  the  public 
market.  Why  is  this  ?  Simply  because  no  living 
man  can  judge  what  will  be  the  value  of  those  dol 
lars  when  he  gets  them.  The  holder  of  the  note 
may  be  paid  in  gold  or  its  equivalent.  In  that  case 


LEGAL   TENDER   NOTES.  115 

he  will  have  made  an  enormous  profit  by  keeping 
possession  of  the  note.  On  the  other  hand,  he  may 
be  paid  in  paper,  one  hundred  dollars  of  which  will 
^not  buy  ten  in  gold,  without  any  breach  of  faith  on 
the  part  of  the  Government.  Every  thing  depends 
on  the  relation  between  the  public  expenditures  and 
the  receipts  from  loans  and  taxes.  Should  our  re 
ceipts  be  greater  than  our  expenditure^,  and  the 
volume  of  the  currency  begin  to  diminish  in  conse 
quence,  the  value  of  the  dollar  must  rise  rapidly. 
Should  the  war  and  our  present  financial  policy  both 
be  continued,  no  one  can  tell  how  little  a  paper  dol 
lar  may  be  worth. 

How  is  the  principal  of  ihejfunded  public  debt, 
the  five-twenties,  for  example,  to  be  paid  ?  This 
question  is  intimately  connected  with  the  value  of 
the  future  dollar,  and  we  have  already  shown  that 
the  present  state  of  our  credit  depends  very  much 
on  the  answer  to  it.  Here  the  Government  is  a 
great  loser,  merely  from  the  uncertainty  which  hangs 
over  the  question.  By  the  letter  and  spirit  of  the 
legal  tender  act  the  bonds  can  be  redeemed  in  notes 
at  any  time  after  five  years.  We  tacitly  repudiated 
all  obligation  to  pay  any  portion  of  the  principal  of 
the  public  debt  in  coin,  and  lenders  took  us  at  our 
word  by  giving  us  no  more  for  them  than  for  bonds 
payable  in  paper.  This  was  perfectly  natural,  be 
cause  it  was  not  to  be  supposed  that  we  would  deal 
any  better  by  the  public  creditors  than  we  were 
bound  to  by  the  terms  of  the  contract.  But  about 


116  LEGAL   TENDER   NOTES. 

the  time  the  five-twenty  loan  was  all  taken,  an  offi 
cial  announcement  was  issued  from  the  Treasury 
that  the  principal  of  the  entire  permanent  debt 
should  be  paid  in  coin.  Thus  we  are  placed  in  the 
following  dilemma :  If  we  pay  the  principal  in  coin, 
we  shall  give  the  creditors  much  more  than  they  are 
entitled  to  by  the  strict  terms  of  the  contract.  If 
we  pay  in  xpaper,  we  shall  be  accused  of  a  breach  of 
faith  by  foreigners  who  bought  bonds  without  being 
aware  of  the  terms  of  the  act  authorizing  their  issue. 
Every  enlightened  lover  of  our  country's  good 
name  should  be  gratified  that  the  loan  of  1841,  due 
January  1, 1863,  was  paid  in  coin.  But  the  reasons 
assigned  for  this  act  are  such  as  must  have  annulled 
whatever  good  effect  it  might  otherwise  have  pro 
duced.  They  are  found  in  communications  from 
the  Presidents  of  the  principal  New  York  City 
banks,  and  from  the  Honorable  Secretary  of  the 
Treasury,  laid  before  the  House  of  Eepresentatives 
January  6,  1863.  Had  Congress  been  emphati 
cally  assured  that  every  instinct  of  good  faith  and 
manly  honesty  demanded  that  this  loan  should  be 
paid  in  coin,  because  coin  was  the  only  lawful  money 
when  the  loan  was  contracted,  and  that  such  a  deg 
radation  of  the  national  honor  as  would  be  involved 
in  the  discharge  of  the  loan  in  paper  would  consign 
the  authors  of  the  act  to  the  just  execration  of  en 
lightened  posterity  ;  and,  had  this  view  of  the  case 
been  accepted  by  the  nation,  our  credit  would  have 
been  placed  on  a  firm  basis.  Instead  of  such  views 


LEGAL   TENDER   NOTES.  117 

as  this,  we  find  that  the  act  of  paying  in  coin  is 
apologized  for  on  the  ground  of  its  expediency.  The 
bankers  advise  the  Honorable  Secretary  that  the 
credit  of  the  Government  at  home  and  abroad  would 
be  greatly  promoted  by  payment  in  coin,  while  a 
failure  to  meet  the  just  expectations  of  the  public 
and  the  holders  of  the  loan,  in  this  respect,  would 
deteriorate  the  value  of  all  government  stocks  to  an 
extent  far  exceeding  the  whole  sum  in  question 
(about  $3,000,000).  The  Secretary  adds  that  his 
judgment  u  was  determined  in  favor  of  coin,  not 
merely  by  the  weighty  considerations  growing  out 
of  its  beneficial  influences  on  public  credit,"  but  by 
the  circumstance  that  the  needed  specie  could  be 
obtained  with  great  ease.  It  was,  in  fact,  loaned 
by  the  banks  at  four  per  cent,  interest. 

That  these  reasons  do  not  suffice  to  place  the 
credit  of  the  nation  on  the  required  footing  will  be 
evident  on  reflecting  that  we  want,  not  a  reason 
founded  on  temporary  and  adventitious  circumstan 
ces,  but  a  universal  rule  of  conduct ;  a  rule  founded 
on  such  reasons  that  it  cannot  fie  departed  from. 
We  want  an  authoritative  and  unequivocal  recog 
nition  by  Congress  and  the  country  of  this  principle. 
Good  faith  demands  that  every  loan  contracted  ~by 
the  Government  when  coin  only  was  a  legal  tender 
should  Repaid  in  coin. 

The  rule  finally  laid  down  by  Mr.  Chase,  and 
already  referred  to  in  speaking  of  the  principal 
of  the  five-twenties  was,  that  the  principal  of  the 


118  LEGAL  TENDEK  NOTES. 

permanent  debt,  including  all  bonds,  should  be  paid 
in  coin,  but  that  the  principal  of  all  the  temporary 
loan  was  payable  in  legal  tender  notes.  This  deci 
sion  gives  rise  to  the  ethical  question,  How  does  the 
circumstance  that  a  loan  is  "temporary"  modify 
the  obligation  to  pay  it  ?  The  difficulty  of  answer 
ing  it  is  increased  by  the  circumstance  that  the  h've- 
twenty  loan,  declared  payable  in  coin,  was  all  con 
tracted  by  borrowing  paper,  while  the  seven-thirty 
loan,  declared  payable  in  paper,  was  nearly  all  con 
tracted  by  borrowing  coin. 

It  has  sometimes  been  urged,  in  extenuation  of 
the  act  of  refusing  to  pay  the  latter  loan  in  coin, 
that  there  was  no  agreement  to  pay  it  thus.  If  we 
admit  such  a  plea  as  this,  our  credit  is  good  for 
nothing.  See  what  courses  the  plea  would  justify  : 
Congress  has  enacted  that  a  number  of  debts  and 
dues  should  be  paid  in  coin,  but  has  never  agreed  to 
pay  any  thing  in  gold  coin.  So  a  special  coinage  of 
bronze  dollars  of  the  same  weight  as  the  gold  dol 
lar  might  be  authorized,  and  the  entire  interest  of 
the  public  debt  might  be  paid  in  this  worthless 
bronze,  merely  because  the  word  "  gold "  did  not 
appear  before  the  word  "  coin."  And  even,  should 
gold  coin  be  distinctly  named  in  the  agreement,  the 
quantity  of  pure  gold  in  the  dollar  might  be  indefi 
nitely  reduced  on  the  plea  that  Congress  had  never 
agreed  to  continue  the  same  weight  of  gold  in  the 
dollar.  It  is  clear  that  a  people  who  would  swin 
dle  by  such  verbal-  quibbles  would  neither  deserve 
nor  enjoy  any  credit  whatever. 


LEGAL   TENDER   NOTES.  119 

It  has  already  been  argued  that  a  further  increase 
of  the  public  debt  is  neither  necessary  nor  expedient. 
But,  if  borrow  we  must,  our  true  course  is  to  nego 
tiate  all  future  loans  on  a  gold  basis,  by  borrowing 
nothing  but  gold  coin  or  bullion,  and  agreeing  to 
pay  nothing  but  a  given  weight  of  gold  coin.  This 
coin  may  then  be  sold  for  currency  at  the  highest 
market  rates.  At  the  present  price  of  gold  every 
million  in  coin  would  cancel  2J  millions  of  the 
public  debt,  and  diminish  the  volume  of  the  currency 
by  the  same  amount.  Government  would  receive 
proposals,  not  for  a  purchase  of  bonds,  but  for  a  loan 
of  bullion  (or  coin),  repayable  at  the  pleasure  of  the 
Government  after  one,  three,  or  five  years,  and  hold 
ers  would  be  asked  simply  to  specify  the  lowest 
rate  of  interest  which  they  would  accept.  It  would 
be  better  for  the  Government  to  pay  twelve,  or  even 
fifteen  per  cent,  interest  on  such  a  loan,  than  to  sell 
10-40  bonds  at  par.  Borrowing  a  million,  for  ex 
ample,  at  fourteen  per  cent,  interest,  the  principal 
and  interest  will  be  as  follows  : 

Principal,     ". ; '     .         .         .     $1,000,000 
Annual  interest,         .         .  140,000 

At  the  present  price  of  gold  (January,  1865)  Gov 
ernment  will  receive  $2,300,000  in  currency  for  the 
million  in  coin.  To  command  the  same  amount 
of  currency  by  the  sale  of  JLO-40  bonds,  the  debt 
would  be — 


120  LEGAL   TENDER   NOTES. 

Principal,     .        .     '-  V/;      .     $2,300,000 
Annual  interest,       ?hl'      *?*"          115,000 

Thus,  while  borrowing  bullion  at  fourteen  per 
cent.,  the  interest  would  be  greater  by  $25,000,  the 
principal  would  be  less  by  more  than  half.  Does 
the  country  really  comprehend  that  for  every  $100 
received  into  the  treasury  from  loans,  we  not  only 
pay  $12  interest,  but  agree  to  pay  $230  for  princi 
pal?  While  we  cannot  cancel  the  present  debt 
without  paying  $130  premium  on  every  hundred 
borrowed,  we  can  cancel  that  proposed  without  pay 
ing  any  premium,  whenever  the  Government  is  able 
to  borrow  money  at  less  than  fourteen  per  cent,  in 
terest. 

It  may  be  asked,  "  Why  have  a  double  transfer 
of  gold  ?  If  we  can  get  par  in  gold  for  the  bonds, 
we  can  get  the  equivalent  of  gold  in  currency. 
Then  why  not  sell  the  bonds  directly  for  currency, 
and  thus  save  handling  the  gold  ?  " 

There  are  two  reasons  why  the  bonds  should  be 
negotiated  only  for  gold,  or  its  absolute  equivalent : 
The  true  state  of  the  public  credit  will  then  be  evi 
dent  to  the  country,  and,  if  it  is  bad,  means  will  un 
doubtedly  be  taken  to  improve  it.  An  evil  must 
be  seen  and  felt  before  any  great  pains  will  be  taken 
to  heal  it.  The  present  system  of  receiving  legal 
tender  notes  as  gold  in  exchange  for  gold  bonds, 
and  paying  them  out  as  paper,  supplies  a  convenient 
hole,  in  which,  ostrich  like,  to  hide  our  heads  to  the 


LEGAL   TENDER   NOTES.  121 

true  state  of  our  credit.  Doubtless  great  numbers 
of  loyal  citizens  think  that  so  long  as  a  10-40  bond 
will  bring  par  in  legal  tender  notes  the  Government 
credit  is  good.  This  is  as  if  an  importer  should 
think  he  was  making  a  profit  so  long  as  he  sold  his 
goods  for  a  higher  price  in  paper  than  he  paid  in 
gold. 

The  great  reason  for  borrowing  bullion  is,  that 
there  would  be  no  doubt  how  the  debt  should  be 
paid.  That  unfortunate  and  much  abused  word 
"  Dollar,"  the  meaning  of  which  can  be  fixed  by 
any  subsequent  Congress  to  suit  the  real  or  supposed 
exigencies  of  the  times,  ought  not  to  be  suffered  to 
appear  in  the  contract.  The  bond  should  be  a 
pledge  of  faith  to  pay  a  certain  specified  weight  of 
gold  coin  or  bullion.  The  advantage  of  such  a  con 
tract  will  appear  from  the  consideration  that  the 
depreciation  of  the  gold  value  of  our  bonds  may  be 
traced  to  three  sources  : 

1.  Throwing  such  large  quantities  on  the  mar 
ket. 

2.  Fear  on  the  part  of  the  community  that  some 
thing  may  happen  to  the  Government  to  cause  a 
general  destruction  of  the  national  debt. 

3.  Fear  that  the  word  "  dollar,"  or  "  dollar  in 
coin,"  may,  10  or  30  years  hence,  mean  something 
different  from  what  it  does  now. 

Now,  it  is  plain  that,  while  the  first  two  causes 
would  not  be  avoided  by  the  proposed  plan,  the  last 
would.     It  is,  therefore,  worth  trying,  at  the  least. 
6 


ill  b 


.K* 


CHAPTEE  Y. 

INFLUENCE  OF  THE  LEGAL  TENDER  NOTES  ON  PRIVATE 
FAITH   AND   THE   BUSINESS   OF   THE   COUNTRY. 

THE  value  of  the  entire  circulating  medium  of  a 
country,  be  it  gold,  silver,  paper,  or  wampum,  is 
subject  to  this  general  law :  that  it  can  never  be  in 
creased  beyond  a  certain  limit,  no  matter  how  much 
you  may  increase  the  volume  of  currency.  The 
total  value  of  the  money  actually  required  to  trans 
act  the  business  of  the  United  States  is,  on  an  aver 
age,  about  $250,000,000  in  gold.  When  business 
is  "  brisk,"  and  a  great  deal  of  buying  and  selling 
is  done,  the  value  of  the  money  increases ;  when 
business  is  dull  it  diminishes.  Thus  it  may,  un 
der  certain  circumstances,  rise  to  $300,000,000,  or 
fall  to  $200,000,000.  A  paper  issue,  though  irre 
deemable,  will  not  depreciate  materially  so  long  as 
its  amount  is  kept  within  the  required  limit ;  but, 
exceed  this  limit,  and  depreciation  is  inevitable.  If 
the  amount  is  double  what  is  necessary,  it  will  de 
preciate  to  one  half;  if  treble,  to  one  third,  aud  so 
on.  But  we  must  consider  as  currency  proper  only 


INFLUENCE   OF   LEGAL   TENDER   NOTES.  123 

that  portion  of  the  money  of  the  community  which 
is  actually  in  use  for  the  purpose  of  buying  goods  or 
paying  debts.  If  any  is  hoarded,  either  for  its  own 
sake  or  for  the  purpose  of  finally  putting  it  to  some 
other  use  than  buying,  it  must  be  excluded  from 
our  estimate  of  the  total  value.  Hence  gold  and 
silver  must  be  excluded  whenever  they  have  ceased 
to  circulate  as  money. 

If  our  currency  were  entirely  of  gold,  and  greater 
in  value  than  $250,000,000,  the  excess  would  neces 
sarily  cease  to  circulate ;  it  would  either  be  hoard 
ed  for  use  at  some  future  time,  exported,  or  melted 
up  into  articles  of  jewelry.  The  fact  that  it  may 
be  put  to  other  uses  than  that  of  money,  thus  pre 
vents  its  value  from  depreciating. 

In  a  country  possessed  of  no  great  moneyed  insti 
tutions,  where  little  credit  is  given,  and  no  debts 
incurred  to  be  paid  at  distant  periods,  the  evils  of  a 
depreciating  currency  are  not  so  seriously  felt  as  in 
a  country  differently  circumstanced.  If  a  dollar 
bill,  starting  at  par  in  gold,  is  in  the  course  of  a 
year  gradually  diminished  to  fifty  cents,  it  may  per 
haps  have  passed  through  hundreds  of  hands  in  the 
mean  time,  so  that  the  loss  of  fifty  cents  has  been 
divided  among  hundreds  of  people.  But  if,  at  the 
beginning  of  the  year,  an  individual  who  did  not 
foresee  the  depreciation,  agreed  to  receive  the  bill 
as  a  gold  dollar  at  the  end  of  the  year,  he  would 
thereby  lose  one-half. 

As  the  currency  depreciates  prices  must  rise  in 


124:     INFLUENCE  OF  LEGAL  TENDER  NOTES. 

proportion,  and,  if  the  proper  equilibrium  to  which 
prices  tend  is  preserved,  they  will  all  rise  in  the 
same  proportion.  Thus,  if  one  coat  is  worth  as 
much  as  two  pair  of  boots  before  the  depreciation, 
it  will  still  be  worth  two  pair  of  boots  afterward, 
unless  some  circumstance  other  than  the  deprecia 
tion  affect  the  price. 

Another  relationship  of  value  necessarily  holds 
between  the  prices  in  gold  and  in  currency  of  all 
commodities.  If  a  coat  is  worth  $20  in  gold,  $1  in 
gold  worth  $2  in  currency,  and  three  barrels  of  flour 
worth  a  coat,  then  one  barrel  of  flour  is  worth  $13-J 
in  currency.  If  the  barrel  of  flour  is  worth  but  $10 
in  currency  here,  and  $8  in  gold  in  England,  it  will 
necessarily  be  exported  until  its  price  here  rises,  or 
the  price  in  England  falls  so  that  the  difference  only 
pays  for  the  risk  and  expense  of  shipping.  Simple 
as  these  principles  are,  they  are  very  imperfectly 
understood,  else  we  should  hear  far  less  of  talk  about 
fictitious  premium  on  gold,  effects  of  speculation, 
&c. 

As  moneyed  institutions  rise,  as  large  amounts  of 
property  take  the  form  of  debts,  as  banks,  savings 
banks,  insurance  and  trust  companies,  railroad  corpo 
rations,  and  other  institutions  absorbing  large  sums 
of  money  for  payment  at  distant  periods  begin  to  be 
established,  then  it  is  that  a  depreciated  currency  be 
comes  really  destructive.  Let  us  see  what  was  in 
volved  in  that  sweeping  enactment  which  made  bills 
a  legal  tender  in  payment  of  all  private  debts. 


INFLUENCE   OF   LEGAL   TENDER  NOTES.  125 

Three  years  ago  200  mechanics  each  put  $100  In 
gold  into  a  savings  bank.  The  savings  bank  after 
ward  loaned  this  $20,000  to  a  shipbuilder,  who  em 
ployed  it  in  building  a  ship.  He  sends  the  ship  to 
England  and  sells  her  for  $22,000  in  gold,  making 
ten  per  cent,  legitimate  profit.  By  every  principle 
of  justice,  $20,000  of  the  money  belongs  to  the  sav 
ings  bank.  But  now  the  legal  tender  clause  comes 
in  and  declares  the  builder  relieved  from  the  debt 
on  payment  of  20,000  paper  dollars.  He  therefore 
buys  these  paper  dollars  with  perhaps  $8,000  in  gold, 
pays  them  to  the  bank,  and  keeps  the  additional 
$12,000  for  his  own  private  use.  He  can  cover 
Mrs.  Shipper  with  diamonds,  indulge  in  riotous  liv 
ing  during  the  rest  of  the  war,  and  furnish  to  the 
country  a  striking  example  of  commercial  prosper 
ity. 

A  professional  man,  dependent  entirely  on  his 
income  for  support,  insured  his  life  in  order  that  his 
family  might  not  be  left  penniless  at  his  death.  The 
life  insurance  company  loans  the  money  to  Mr. 
Shoddy,  who  invests  it  in  manufacturing  capital. 
With  the  rise  in  gold  Mr.  Shoddy  finds  both  his 
capital  and  profits  apparently  to  increase  in  a  corre 
sponding  ratio.  When  his  debt  is  due  he  finds  that 
he  can  sell  one-half  his  stock  for  greenbacks  suffi 
cient  to  pay  it,  he  retaining  the  other  half,  though 
it  also  rightfully  belongs  to  the  insurance  company. 

Banking  capital  suffers  in  the  same  way,  unless 
the  bank  holds  specie  to  the  full  amount  of  its  capi- 


126     INFLUENCE  OF  LEGAL  TENDER  NOTES. 

tal.  If  a  bank  holds  no  specie,  its  capital  and  profits 
are  in  the  form  of  an  excess  of  debts  due  to  the 
bank  over  those  due  from  it,  and  whatever  deterio 
rates  the  value  of  those  debts  deteriorates  the  capi 
tal  in  the  same  proportion.  If  it  holds  specie  to  the 
full  amount  of  its  capital  and  profits,  then  the  debts 
due  and  those  payable  balance  each  other,  and  it 
suffers  nothing  from  depreciation  of  the  currency. 
It  suffers  in  proportion  to  the  excess  of  capital  and 
profits  over  specie  reserve. 

Suppose,  now,  that  a  bank  holding  specie  to  the 
amount  of  one-tenth  of  its  capital  had,  toward  the 
end  of  1861,  refused  to  discount  any  more  notes, 
called  in  all  its  paper,  and  thus  collecting  its  entire 
capital  in  the  form  of  specie,  had  locked  that  spe 
cie  up,  only  drawing  from  it  what  was  necessary  to 
pay  its  regular  semi-annual  dividends  in  currency. 
For  each  share  of  $100,  the  cost  of  those  divi 
dends,  supposing  each  to  be  three  per  cent,  would 
have  been  as  follows : 

Jan.,  1862   $3.00  July,  1863    $2.14 

July,  1862   $2.70  Jan.,  1864    $1.96 

Jan.,  1863   $2.14  July,  1864   $1.36 

Total  cost  in  gold  $13.30,  leaving  $86.70  of  the 
capital  unimpaired,  which  would  be  wrorth,  with 
gold  at  2.20,  $190  per  share.  As  things  actually 
stand,  the  stock  of  such  a  bank  is  only  worth  $112. 
Thus,  by  using  their  capital  for  the  benefit  of  the 


INFLUENCE   OF   LEGAL   TENDER   NOTES.  127 

public,  the  banks  have,  in  three  years,  lost  40  per 
cent,  on  its  entire  amount,  beside  interest.  Includ 
ing  interest,  they  have  lost  50  per  cent.  This  lost 
capital  has  not  gone  to  the  Government,  but  to  that 
portion  of  the  community  who  have  done  business 
on  borrowed  capital,  and  has  of  course  caused  their 
business  to  prosper  in  proportion. 

Some  astute  economists  hold  that  banks  which 
hold  a  large  percentage  of  specie  have  an  interest 
in  the  rise  of  coin,  because  the  coin  in  their  vaults, 
and  their  stock  also,  will  thereby  increase  in  price. 
If  the  community  coincide  in  opinion  with  those 
wiseacres  ;  if  owners  of  bank  stock  are  satisfied  with 
seeing  their  stock  worth  a  great  many  dollars,  with 
out  caring  whether  those  dollars  are  themselves 
worth  any  thing  or  not;  then  the  economists  in 
question  little  dream  how  rich  a  mine  of  national 
wealth  they  have  struck.  Our  country  can  be  made 
the  most  powerful  in  the  globe,  our  men  transform 
ed  into  giants,  and  our  manufactures  made  to  exceed 
those  of  all  other  nations  put  together,  by  very  sim 
ple  acts  of  Congress.  In  the  first  place  let  it  be 
enacted  that  the  gold  dollar  shall  be  reduced  to  one- 
fifth  of  its  present  weight,  and  all  other  coins  in 
proportion ;  and  that  previous  to  the  new  coinage 
the  present  gold  dollar  shall  be  lawful  money  and 
legal  tender  for  $5 ;  the  eagle  for  $50,  and  so  on. 
The  consequence  will  be  that  the  price  of  all  the 
real  and  personal  property  of  the  country  will  be 
increased  five-fold.  The  man  who  was  before  worth 


128    INFLUENCE  OF  LEGAL  TENDER  NOTES. 

only  $2,000  will  suddenly  find  himself  worth  $10,000 ; 
the  real  and  personal  estate  of  the  country,  instead 
of  being  worth  only  $16,000,000,000  will  now  be 
worth  $80,000,000,000.  It  would  be  nothing  more 
than  fair  to  divide  this  enormous  increase  of 
$64,000,000,000  equally  between  the  Government 
and  the  individual  property  holders ;  the  former 
thus  getting  $32,000,000,000,  and  leaving  the  coun 
try  more  than  twice  as  wealthy  as  in  the  beginning. 
This  enormous  sum  would  pay  off  our  national 
debt,  and  enable  us  to  become  the  first  military 
power  of  the  globe. 

The  act  need  not  be  confined  to  money  value. 
It  might  also  be  enacted  that  hereafter  the  lawful 
foot  should  consist  of  only  six  inches  instead  of 
twelve  ;  and  that  the  pound  should  contain  but  two 
ounces  instead  of  sixteen.  Our  people  would  then 
find  themselves  grown  to  the  gigantic  height  of 
eleven  or  twelve  feet,  and  our  artillery  would  throw 
shot  weighing  thousands  of  pounds !  What  earthly 
power  could  take  the  field  against  men  twelve  feet 
high,  using  cannon  throwing  thousand-pound  shot, 
backed  by  a  Government  with  $32,000,000,000  of 
money?  If  the  economists  aforesaid  are  true  to 
their  principles  they  will  answer  NONE. 

If  all  this  were  actually  done,  it  is  probable  that 
a  large  part  of  the  community  would  not  be  long 
in  concluding  that  the  apparent  increase  in  the 
wealth  of  the  country,  the  size  of  the  man,  and  the 
weight  of  the  artillery,  was  all  fictitious ;  that  a  piece 


INFLUENCE   OF   LEGAL    TENDER   NOTES.  129 

of  gold  had  increased  in  price,  not  because  it  was 
worth  any  more  than  before,  but  because  the  dollar 
was  worth  less,  just  as  the  apparent  increase  in  the 
height  of  the  men  proceeds  from  a  shortening  of  the 
foot  measure.  It  can  hardly  be  necessary  to  tell  any 
thinking  man  that  this  opinion  is  correct ;  that  the 
real  value  of  gold  has  not  increased  a  jot  since  the 
beginning  of  the  war,  but  rather  diminished,  because 
there  is  now  less  use  for  it ;  that  it  is  now  exported 
just  as  freely  as  ever,  if  not  more  so ;  and  that  bank 
stock  which  since  1860  has  risen  from  par  to  200  is 
really  less  valuable  now  than  then. 

Heretofore  one  distinguishing  feature  of  civil 
ized  Governments  has  been  the  protection  which 
they  have  afforded  to  property.  They  protect  the 
owner  not  only  in  that  which  he  holds  in  his  own 
hands,  but  in  that  which  he  entrusts  to  others.  The 
advantage  which  society  thus  gains  is  strikingly 
shown  by  an  illustration  of  the  "  transmutatians  of 
wealth  "  in  Bowen's  Political  Economy.  A  laborer 
saves  $100  from  his  earnings.  "  What  will  he  do 
with  this  $100  ? "  In  a  rude  state  of  society  among 
a  half-civilized  people,  or  under  the  government  of 
a  Turkish  Pacha,  property  being  insecure,  he  would 
probably  obtain  it  in  the  form  of  gold  or  silver  cojn, 
and  bury  it  in  the  corner  of  his  cellar  or  garden. 
There,  sure  enough,  it  would  remain  without  change, 
and  therefore  without  income  or  increase.  But  in 
this  country,  in  England,  or  in  France,  he  would 
probably  put  it  into  the  *  savings  bank.  He  would 
6* 


130     INFLUENCE  OF  LEGAL  TENDER  NOTES. 

thus  benefit  not  only  himself,  by  receiving  interest 
on  his  money,  but  also  the  community,  by  placing 
$100  more  capital  at  the  disposal  of  the  customers 
of  the  bank.  The  latter  would  be  enabled  to  make 
more  shares,  bake  more  bread,  and  import  more 
cloths. 

Our  own  country  will  now  have  to  be  excepted 
from  the  list  of  those  in  which  it  is  always  desirable 
to  invest  coin  in  savings  banks,  rather  than  bury  it 
under  ground.  The  depositors  in  the  savings  banks 
of  Massachusetts  alone  have  been  defrauded  out  of 
twenty  millfon  dollars  of  their  savings,  which  they 
would  have  kept  had  they  buried  them.  It  is  im 
possible  to  form  an  accurate  estimate  of  the  entire 
losses  sustained  by  the  creditor  class  of  the  commu 
nity,  but  the  following  is  an  exhibit  of  some  items. 
Debts  due  the  following  institutions  have  been  di 
minished  by  50  per  cent,  of  the  amount  given : 

Banks  of  Issue,  .  ;.  .'  .  $280,000,000 
Savings  Banks,  V  .  .  100,000,000 
Insurance  and  Trust  Companies,  .  50,000,000 

If  to  these  we  add  the  losses  sustained  by  indi 
viduals,  we  shall  probably  have  a  sum  total  of 
$1,000,000,000,  one-half  of  which  has  changed 
hands  by  the  legal  tender  act.  What  a  commentary 
is  this  on  our  financial  policy — that  the  owners  of 
property  to  the  extent  of  $1,000,000,000  would  have 
done  better  to  bury  their  property  in  the  earth  than 


INFLUENCE   OF   LEGAL    TENDER   NOTES.  131 

suffer  it  to  be  loaned  the  public  for  the  public  bene 
fit  !  What  would  we  have  thought  in  18G1  at  such 
a  conversation  as  the  following  between  an  owner 
of  bank  stock  and  an  individual  of  sufficient  pres 
cience  to  see  what  was  coming  ? 

u  I  advise  you,  sir,  speedily  to  sell  your  bank 
stock  for  coin,  and  keep  that  coin  for  three  years  or 
more  ;  for  if  you  keep  your  stock,  it  and  all  its  pro-, 
ceeds  will  then  be  worth  little  more  than  half  as 
much  as  the  gold." 

"  What  catastrophe  is  coming  ?  Our  stock  is 
nearly  all  in  the  form  of  well-secured  promissory 
notes  of  sound  commercial  men,  and  I  cannot  con 
ceive  how  they  should  fail  to  pay  us." 

"  No  catastrophe  at  all  is  coming.  Your  prop 
erty  will  be  legislated  out  of  your  hands  so  smoothly 
and  gently  that  most  of  your  stockholders  will  never 
know  it.  They  will,  at  the  same  time,  be  furnished 
with  a  pair  of  magnifying  spectacles  which  will 
make  every  dollar  look  like  a  quarter-eagle  ;  so  that 
when  their  stock  is  reduced  to  one-half,  it  will  look 
more  valuable  than  ever." 

"  It  will  then,  I  suppose,  be  seized  by  the  Gov 
ernment." 

"  There  you  are  mistaken.     The  Government  will 
suffer  with  you.' 

"  Then  what  will  become  of  our  property  ? ' ' 

This  question  is  worth  considering.  What  has 
become  of  all  this  $500,000,000  which  the  moneyed 
institutions  and  individual  creditors  have  lost  ?  It 


132     INFLUENCE  OF  LEGAL  TENDER  NOTES. 

has  not  been  destroyed.  It  lias  passed  into  the 
possession  of  those  men  who,  during  the  time  that 
gold  was  rising,  were  doing  business  on  borrowed 
capital.  For  every  debtor  there  must  be  a  creditor ; 
there  must  be  as  much  money  owing  as  being  owed. 
How  the  wealth  has  changed  hands  may  be  seen 
from  the  examples  of  the  shipbuilder  and  the  manu 
facturer  already  cited.  Another  illustration  may  be 
given  in  the  case  of  an  importer.  In  May,  1864,  an 
importer  borrows  $20,000  from  a  bank,  and  buys 
foreign  exchange  with  the  money  to  pay  for  cloths 
in  England.  In  sixty  days  his  cloths  arrive  in  New 
York.  The  premium  on  gold,  in  the  mean  time, 
has  risen  from  80  per  cent,  to  150  per  cent.  The 
price  of  his  goods  has  increased  in  a  corresponding 
ratio ;  they  are  worth  40  per  cent,  more  in  currency 
than  they  would  have  been  two  months  previously. 
He  sells  out,  and  finds  that,  in  addition  to  the  regu 
lar  profits  of  trade  which  he  would  have  enjoyed 
had  there  been  no  advance  in  gold,  he  has  made  40 
per  cent,  on  his  entire  outlay  solely  by  the  rise  in 
gold,  or,  to  speak  more  accurately,  the  fall  in  U.  S. 
notes. 

In  what  respect,  let  me  ask,  is  this  importer  bet 
ter  than  the  "  heartless  speculator  "  of  Wall  Street, 
who  "  seeks  to  coin  money  out  of  the  national  mis 
fortunes  "  ?  He  has  made  his  money,  practically,  in 
the  same  way,  namely,  by  buying  gold,  and  sixty 
days  afterward  selling,  not  indeed  the  gold,  but  the 
cloth  bought  with  the  gold,  which  amounts  to  the 


INFLUENCE   OF   LEGAL   TENDER  -NOTES.  133 

same  thing.  Thus  every  importer  of  foreign  goods 
is,  per  force,  a  "  speculator  for  the  rise,"  whether  he 
will  or  no.  Is  it  wonderful  that  thousands,  who 
would  otherwise  devote  themselves  to  honest  indus 
try,  are  seduced  into  the  giddy  rounds  of  speculation 
when  they  see  fortunes  made  so  rapidly  ?  And  who 
is  most  to  blame,  the  man  seduced,  or  the  system 
which  seduces  him  by  continuing  a  policy  which 
offers  such  temptations  ? 

As  favorable  a  view  as  we  can  take  of  the  legal 
tender  act  is  that  it  enacts,  in  substance,  as  follows : 
That  whenever  any  debt  is  discharged  within  the 
United  States  the  creditor  shall  forfeit  to  the  debtor 
such  percentage  of  the  debt  as  is  equal  to  the  depre 
ciation  of  legal  tender  notes  since  the  debt  was  con 
tracted.  This,  in  fact,  is  the  simple  sum  and  sub 
stance  of  the  enactment.  It  made  every  promissory 
note,  every  bank  bill,  every  dollar  of  bank  stock, 
every  bond  of  every  state  and  railroad  corporation, 
and,  indeed,  every  promise  to  pay  money,  a  real  un 
avoidable  bet,  which  the  creditor  wins  when  gold 
goes  down,  and  the  debtor  when  gold  goes  up. 
This,  in  fact,  is  the  result  of  every  system  of  irre 
deemable  legal  tender  paper,  and  must  continue  to 
be  while  human  nature  remains  as  it  is. 

It  must  be  remembered  that,  in  the  general  con 
fiscation  of  fifty  per  cent,  of  all  old  debts  which 
happen  to  be  payable  now,  the  Government  gets  no 
share  whatever  of  the  spoils.  The  shipbuilder  has 
pocketed  the  savings  of  the  mechanics,  the  manu- 


INFLUENCE  OF  LEGAL  TENDER  NOTES. 

facturer  those  of  the  life  insurance  company,  and 
the  importer  the  capital  of  the  bank,  but  the  Gov 
ernment  nothing  at  all.  Had  we  enacted  that  all 
debts  due  in  the  country  should  be  paid  through  the 
Government,  the  creditor  paying  the  Government 
coin,  and  Government  paying  the  debtor  in  legal 
tender  notes,  so  as  to  gain  the  amount  of  the  depre 
ciation,  the  creditor  would  have  had  the  satisfaction 
of  knowing  his  loss  to  be  the  public  gain.  As  things 
are,  he  has  no  satisfaction  whatever. 

To  a  lover  of  justice  the  discussion  of  such  a  sys 
tem  of  spoliation,  from  a  purely  utilitarian  point  of 
view,  must  be  repulsive  in  the  extreme.  ~No  man 
who  believes  that  honesty  is  the  best  policy ;  no 
man  who  believes  in  a  moral  government  of  the  uni 
verse  ;  no  man  who  believes  that  the  laws  of  nature 
always  act  to  preserve  the  good  and  destroy  the  evil, 
will  ask  for  any  other  judgment  on  the  system  than 
that  which  will  be  pronounced  by  his  own  conscience. 
But  it  will  be  instructive  to  trace  all  this  injustice  to 
its  economic  effects,  present  and  future,  if  only  to 
show  how  we  are  to  be  punished  for  transgressing 
the  moral  law. 

It  is  plain  that,  while  gold  has  been  rising  from 
par  to  a  premium  of  one  hundred  and  thirty  per 
cent.,  the  creditor  class  of  the  community,  represent 
ed  by  the  owners  of  bank  stock,  depositors  in  savings 
banks,  holders  of  bonds  and  mortgages,  and  the  fru 
gal  poor  who  have  loaned  their  savings,  have,  on 
the  whole,  been  subjected  to  heavy  and  unjust  losses, 


INFLUENCE   OF    LEGAL   TENDER   NOTES.  135 

while  the  debtor  class,  represented  by  those  who  live 
beyond  their  income,  or  do  business  on  borrowed 
capital,  have  made  heavy  and  illegitimate  profits. 
Owing  to  the  different  functions  of  these  two  classes 
in  the  social  economy,  these  gains  and  losses  are 
productive  of  effects  which  vitally  concern  the  best 
interests  of  society,  and  are,  therefore,  well  worthy 
the  serious  consideration  both  of  the  philosopher  and 
the  statesman. 

The  debtor  class,  having  been  from  time  to  time 
relieved  of  a  percentage  of  their  equitable  liability, 
have  found  less  difficulty  than  usual  in  meeting 
their  obligations.  Hence  there  have  been  fewer 
failures  than  common,  as  well  as  larger  profits,  and 
unusual  business  prosperity.  For  the  country  is 
naturally  considered  prosperous  when  there  are  few 
failures  and  large  profits.  The  corresponding  losses 
of  the  creditor  are  productive  of  little  inconvenience 
to  him,  and  are  almost  entirely  overlooked.  Pro 
ductive  of  little  inconvenience  because  the  very  fact 
of  the  creditor's  willingness  and  ability  to  resign  the 
use  of  his  property  to  his  neighbor  shows  that  he 
can  do  without  it.  No  one  loans  money  for  a  month, 
a  year,  or  a  term  of  years,  unless  he  is  able  to  forego 
the  use  of  all  except  the  interest  during  that  length 
of  time ;  consequently,  if  the  principal  of  his  loan  is 
impaired,  or  even  wholly  destroyed,  it  does  not  in 
terfere  with  the  regular  course  of  his  business.  His 
loss  is  overlooked  because  it  takes  the  form  of  a  de 
preciation  of  the  currency  in  which  his  debt  is  pay- 


136     INFLUENCE  OF  LEGAL  TENDER  NOTES. 

able ;  nominally  he  loses  nothing,  because  his  debt 
is  worth  as  many  dollars  as  ever.  Thus  the  losses 
which  counterbalance  the  profits  of  the  debtor  are 
entirely  lost  sight  of  by  those  who  take  a  merely  su 
perficial  view. 

The  debtor,  being  more  inclined  to  enjoy  his 
money  than  to  lay  it  up,  very  naturally  spends  a 
large  portion  of  his  profits  in  gratifying  his  desires. 
Hence  an  unusual  consumption  of  luxuries,  and  an 
other  sign  of  prosperity.  It  is  as  if  a  provident 
farmer,  who  had  been  laying  up  a  supply  of  choice 
fruit  for  sale,  should  be  compelled  to  divide  that 
fruit  among  such  of  his  neighbors  as  did  not  believe 
that  the  products  of  the  orchard  were  intended  for 
any  other  use  than  immediate  enjoyment.  The 
tables  of  the  community  might  be  greatly  improved 
for  a  week.  But  at  the  end  of  the  week  the  wealth 
would  have  been  consumed.  A  nation  can  no  more 
"  eat  its  cake  and  have  it  too  "  than  can  an  individ 
ual.  Thus  the  depreciating  currency  encourages  the 
consumption  and  enjoyment  of  wealth  rather  than 
its  preservation.  This  is  the  real  nature  and  effect 
of  the  prosperity  which  is  so  attractive  when  we  do 
not  look  below  the  surface. 

When  Government  wishes  a  loan,  it  must  apply 
to  the  creditor  class.  Without  a  temper  and  dispo 
sition  peculiar  to  this  class  no  government  could 
ever  borrow.  There  must  be  a  willingness  on  the 
part  of  owners  of  property  to  forego  the  present  en 
joyment  of  wealth,  and  part  with  it  for  a  long  series 


INFLUENCE   OF   LEGAL   TENDER  NOTES.  137 

of  years,  in  consideration  of  receiving  a  small  frac 
tion  of  it  annually  in  the  form  of  interest.  The 
more  universal  this  disposition  to  lend,  the  better 
the  terms  on  which  the  Government  can  borrow. 
The  Government  ought,  therefore,  to  encourage  this 
disposition  by  making  all  property  in  the  form  of 
debts  as  secure  as  possible.  The  transfers  of  the 
ownership  of  this  great  reserve  power  to  the  business 
and  debtor  class,  not  only  takes  it  from  those  who 
are  disposed  to  lend  and  gives  it  to  those  who  are 
disposed  to  use  and  spend  on  their  own  account,  but 
discourages  that  disposition  without  which  Govern 
ment  can  never  borrow. 

The  delusive  prosperity  caused  by  this  transfer 
is  only  the  fattening  of  the  canker-worm  which  is 
eating  out  the  very  vitals  of  public  credit. 

The  writer  has  no  disposition  to  hide  the  good 
or  exaggerate  the  evil  of  the  measures  under  con 
sideration.  He  has  shown  that  the  legal  tender 
notes,  or  rather  their  depreciation,  has  promoted 
commercial  prosperity  and  the  general  enjoyment  of 
wealth  by  the  community.  It  wras  only  right  to 
show,  in  addition,  that  this  additional  enjoyment 
arose  from  the  consumption  of  wealth  which  would 
otherwise  have  been  saved  or  turned  into  the  chan 
nels  of  war. 

So,  on  the  other  hand,  he  is  prepared  to  admit 
that,  had  our  business  during  the  war  been  con 
ducted  on  a  specie  basis,  the  commercial  and  busi 
ness  depression,  and  a  general  inability  on  the  part 


138     INFLUENCE  OF  LEGAL  TENDER  NOTES. 

of  the  debtor  class  to  command  the  usual  amount 
of  the  necessaries  and  luxuries  of  life,  would  have 
been  inevitable.  Still  more  marked  would  have 
been  this  seeming  poverty,  had  the  war  been  carried 
on  mainly  by  taxation,  as  it  is  claimed  it  should. 
But  it  is  contended  that  this  depression  would  not 
have  indicated  any  diminution  of  the  real  power  or 
wealth  of  the  country,  and  that  all  its  evils  would 
have  been  temporary.  To  illustrate  this,  let  us  con 
sider  that  class  of  debtors  whose  case  would  excite 
most  sympathy — farmers  who  had  mortgaged  their 
farms.  Real  estate,  bearing  about  the  same  nominal 
price  now  as  before  the  war,  and  therefore  worth 
only  half  as  much  in  gold,  would  have  fallen  con 
siderably  had  there  been  no  depreciation  of  the  cur 
rency.  But  it  would  not  have  fallen  to  one-falf,  be 
cause  part  of  the  actual  fall  is,  no  doubt,  due  to  the 
unusual  profits  of  trade  and  speculation  having 
stimulated  the  diversion  of  capital  into  those  chan 
nels,  rather  than  into  the  more  solid  investment  of 
real  estate  and  government  bonds. 

But  although  the  farmer  might  thus  be  subject 
to  a  heavy  and  unforeseen  loss,  if  obliged  to  sell  his 
farm  in  order  to  pay  the  mortgages,  yet  his  ability  to 
make  money  from  it  would  be  but  slightly  dimin 
ished,  nay,  would  not  be  diminished  at  all  except 
by  the  war  taxes.  Unless  he  mortgaged  on  specu 
lation,  intending  to  sell  in  order  to  redeem  the  mort 
gage,  he  must  have  calculated  that  he  could  redeem 
it  from  the  produce  of  the  farm.  The  available  pro- 


INFLUENCE   OF   LEGAL   TENDER   NOTES.  139 

duce  being  diminished  by  the  war  tax,  he  would 
have  been  obliged  to  deny  himself  and  his  family 
the  enjoyment  of  the  usual  luxuries,  and  perhaps 
even  some  of  the  necessaries  of  life,  and,  at  the  same 
time,  to  work  harder,  so  as  to  produce  more  corn, 
hay,  and  beef.  Thus  he  would  have  suffered  ;  thus 
the  class  he  represents,  namely,  men  doing  business 
on  borrowed  capital,  would  have  suffered  had  the 
currency  remained  as  valuable  as  specie. 

But  the  important  point  is  that  this  suffering 
would  have  involved  an  increase  in  the  ability  of 
the  nation  to  carry  on  the  war,  just  as  the  enjoy 
ment  permitted  by  the  depreciation  has  caused  a 
diminution  of  that  ability.  In  fact,  the  farmer, 
obliged  to  raise  more  wheat,  hay,  and  beef,  will 
have  more  to  offer  the  Government,  and,  obliged  to 
deny  himself  in  clothing,  will  be  less  a  competitor 
with  the  Government  in  the  purchase  of  that  arti 
cle  ;  Government  will,  therefore,  be  able  to  purchase 
it  more  cheaply. 

Still,  saying  nothing  of  injustice,  it  may  be 
thought  that,  if  the  creditor  class  are  not  sensible  of 
their  loss,  much  harm  will  not  be  done  after  all. 
The  unenlightened  man,  who  knows  nothing  of  po 
litical  economy,  does  not  know  that  he  is  defrauded 
of  his  just  rights  by  being  paid  his  old  debts  in  pa 
per.  How,  then,  can  he  be  discouraged  from  mak 
ing  future  loans  \ 

Such  a  view,  though  specious,  would  be  entirely 
fallacious.  Whatever  theory  may  be  adopted  re- 


140    INFLUENCE  OF  LEGAL  TENDER  NOTES. 

specting  the  moral  government  of  the  universe, 
the  experience  of  mankind  in  all  ages  shows  that 
any  evasion  of  the  great  law  of  compensation  is  an 
impossibility.  In  the  case  in  question,  ignorance  of 
political  economy  can  no  more  prevent  the  legiti 
mate  effect  of  a  wrong  economical  measure  than  ig 
norance  of  toxicology  can  prevent  the  action  of  a 
poison.  We  have  poisoned  the  springs  of  our  true 
wealth  and  greatness,  and  we  shall  most  assuredly 
suffer  the  legitimate  consequences,  though  every 
man  in  the  country  believes  and  proclaims  that  the 
poison  was  a  healthy  and  necessary  stimulant.  Take, 
for  example,  the  case  of  the  man  who  is  unconscious 
of  being  wronged.  Suppose  there  is  a  community 
of  such  people.  If  they  are  not  sensible  of  their 
loss,  its  effect  will  be  all  the  more  lasting.  The  la 
borer  who  put  his  earnings  into  the  savings  bank 
now  sees  that  his  neighbor,  who  turned  his  into 
gold  which  he  kept  in  a  stocking,  has  somehow  done 
better  than  himself.  Not  understanding  the  causes 
which  have  brought  about  this  state  of  things,  he 
will  not  know  when  they  cease  to  exist.  He  will, 
therefore,  during  the  rest  of  his  life  substitute  the 
stocking  for  the  savings  bank,  and  perhaps  teach  his 
children  to  do  the  same. 

Though  specie  payments  should  be  resumed,  our 
entire  financial  system  restored  to  a  healthy  state, 
and  the  savings  bank  patronized  by  all,  with  every 
war  and  rumor  of  war,  with  every  whisper  of  a  sus 
pension  or  a  financial  crisis,  there  will  be  a  general 


INFLUENCE   OF   LEGAL   TENDER   NOTES.  141 

panic  among  the  poor  and  ignorant,  and  a  general 
run  on  the  banks  to  realize  all  notes  and  securities 
in  the  form  of  specie.  And  if  public  opinion  per 
mits  a  suspension  of  specie  payments,  speculation  in 
gold  will  be  resumed  in  all  its  vigor,  in  remem 
brance  of  the  enormous  profits  made  by  this  opera 
tion  in  times  past.  So  long  as  men  remember,  with 
out  disgust,  the  iniquitous  decisions  of  those  judges 
who  have  disgraced  the  very  name  of  LAW,  and  le 
galized  acts  of  perfidy  which  would  put  a  savage  to 
the  blush,  by  declaring  our  paper  money  a  legal 
tender  in  discharge  of  the  most  solemn  contracts  to 
deliver  a  specified  weight  of  gold  or  silver  coin,  so 
long  will  entire  confidence  between  man  and  man 
be  impossible.  The  evil  will  be  corrected  only 
when  the  public  at  large  view  the  acts  and  the  sys 
tem  now  under  consideration  with  such  reprobation 
that  every  one  shall  feel  a  repetition  of  them  to  be 
impossible.  For  how  can  any  man  receive  with  con 
fidence  a  promise  from  his  neighbor  to  pay  a  speci 
fied  sum  in  gold  coin  at  the  end  of  a  term  of  years, 
when  he  does  not  know  but  that  an  ignorant  legis 
lature  and  prejudiced  judiciary  may,  in  the  mean 
time,  entirely  relieve  that  neighbor  from  all  obliga 
tion  to  fulfil  the  contract  ? 

In  his  first  annual  report  on  the  finances,  not 
a  month  before  the  suspension  of  specie  payments, 
Mr.  Chase  warned  Congress  of  the  possible  conse 
quences 'of  a  system  of  government  circulating  notes 
in  the  following  prophetic  words. 


14:2    INFLUENCE  OF  LEGAL  TENDER  NOTES. 

"  The  temptation,  especially  great  in  times  of 
pressure  and  danger,  to  issue  notes  without  adequate 
provision  for  redemption  ;  the  ever-present  liability 
to  be  called  on  for  redemption  beyond  means  how 
ever  carefully  provided  and  managed  ;  the  hazard 
of  panics  precipitating  demands  for  coin  concen 
trated  on  a  few  points  and  a  single  fund ;  the  risk 
of  a  depreciated,  depreciating,  and  finally  worthless 
paper  money ;  the  immeasurable  evils  of  dishonored 
public  faith  and  national  bankruptcy  ;  all  these  are 
possible  consequences  of  the  adoption  of  a  system  of 
government  circulation." 

Suppose,  now,  that  our  paper  money  system  had 
been  expressly  designed  to  produce  all  the  evils  so 
graphically  described  by  the  Honorable  Secretary, 
in  what  respect  would  it  have  been  different  from 
what  it  actually  was  ?  See  how  exactly  it  seemed 
calculated  to  promote  the  four  principal  evils  : 

"  The  temptation,  especially  great  in  times  of 
pressure  and  danger,  to  issue  notes  without  adequate 
provision  for  redemption." 

This  temptation  was  yielded  to  by  issuing  several 
hundred  millions  of  notes  without  any  provision  at 
all  for  redemption. 

"  The  hazard  of  panics,  precipitating  demands 
for  coin  concentrated  on  a  few  points  and  a  single 
fund." 

This  hazard  was  indeed  most  effectually  guard 
ed  against.  But  how  3  By  letting  the  noteholders 
know  in  advance  that  any  demands  for  coin,  delib- 


INFLUENCE   OF   LEGAL   TENDEE   NOTES.  143 

erate  or  precipitous,  would  be  a  waste  of  time  and 
words.  So  tlie  times  when  there  would  have  been 
such  panics  were  indicated  only  by  the  upward 
jumps  in  the  price  of  gold.  This  was  avoiding  the 
hazard  in  the  same  way  that  a  man  who  should 
jump  overboard  in  mid  ocean  from  a  leaky  ship 
would  avoid  the  hazard  of  being  carried  down  with 
her. 

"  The  risk  of  a  depreciated,  depreciating,  and 
finally  worthless  paper  money." 

The  great  risk  and  great  evil  of  a  depreciating 
paper  money  are  found  in  the  losses  it  entails  on 
those  moneyed  institutions  in  which  the  savings  of 
the  nation  are  invested.  Accordingly,  the  currency, 
having  been  left  to  depreciate  as  fast  as  it  would, 
three-fourths  of  the  banking  capital  of  the  country, 
all  the  State  debts,  and  nearly  the  entire  assets  of 
all  savings  banks  and  life  insurance  companies,  were 
fastened  to  it  by  the  legal  tender  clause.  These  in 
terests  have  followed  the  currency  halfway  to  ruin, 
and,  should  it  finally  become  worthless,  must  be 
ruined  with  it. 

"  The  immeasurable  evils  of  dishonored  public 
faith  and  national  bankruptcy." 

The  Treasury  deliberately  refused  to  pay  notes  is 
sued  by  authority  of  law  and  declared  payable  on 
demand  by  the  same  authority.  A  law  was  then 
passed,  under  the  operation  of  which  paper  money 
was  a  legal  tender,  not  only  in  payment  of  these 
notes,  but  in  return  for  one  hundred  millions  of  gold 


144     INFLUENCE  OF  LEGAL  TENDEK  NOTES. 

coin  paid  into  the  Treasury  by  the  people.  If  by 
"  dishonored  public  faith  "  the  Honorable  Secretary 
did  not  mean  a  failure  to  pay  the  notes,  what  did 
he  mean  ?  And  what  did  he  mean  by  "  national 
bankruptcy  "  ?  Is  this  calamity  possible  while  it  is 
possible  to  print  the  words  "  United  States  will  pay 
the  bearer dollars  "  ? 

It  is  one  of  the  embarrassments  of  our  situation 
that  we  cannot  restore  our  finances  to  a  healthy  con 
dition  without  producing  effects  injurious  to  the 
business  interests  of  the  country.  Opposite  causes 
must  produce  opposite  effects.  If,  in  consequence 
of  a  sudden  improvement  in  government  credit,  our 
currency  should  become  as  valuable  as  gold,  we 
should  experience  a  commercial  revulsion  propor 
tioned  to  the  excitement  consequent  upon  the  de 
preciation  of  the  currency.  Those  trading  on  bor 
rowed  capital  would  be  subject  to  heavy  losses,  and 
traders  of  every  class  would  be  obliged  to  sell  their 
goods  below  the  nominal  cost.  The  derangement 
of  trade  thus  produced  will  obstruct  the  operations 
of  supply  and  demand  throughout  their  whole 
course,  as  the  stopping  of  a  single  company  in  a 
marching  column  of  troops  will  throw  the  whole 
into  confusion. 

But  the  real  interests  of  the  nation  would  not,  in 
the  end,  suffer  by  this  revulsion.  If  its  effects  are 
the  reverse  of  those  formerly  described  in  their  su 
perficial  aspect,  they  will  be  equally  so  when  we 
consider  their  ulterior  effects  upon  the  stability  of 


INFLUENCE   OF   LEGAL   TENDER   NOTES.  145 

the  Government,  and  the  highest  economic  interests 
of  the  country.  The  Government  will  gain  by  be 
ing  enabled  to  buy  and  borrow  on  better  terms  than 
before.  The  real  prosperity  of  the  country  will  not 
be  diminished,  but  rather  increased,  because  we  will 
then  turn  our  attention  to  saving  rather  than  enjoy 
ing  our  wealth.  Indeed,  if  every  dollar  of  our  pa 
per  circulation  were  annihilated  to-morrow,  it  would 
be  a  very  serious  question  whether  it  were  not  the 
best  thing  for  the  nation  that  could  happen  ;  whether 
we  would  not  come  out  of  the  commercial  crash 
which  would  be  the  result  a  wiser  people,  in  a  better 
position  to  fulfil  our  mission  to  the  human  race. 
7 


CHAPTEE  VI. 

NECESSITY       OF      PAPER       MONEY THE      LESSONS      OF 

HISTOKY. 

IN  the  last  two  chapters  we  have  set  forth  the 
evils  which  have  flowed  and  must  continue  to  flow 
from  our  issues  of  irredeemable  paper  money.  Re 
specting  the  character  and  extent  of  these  evils 
there  will  be  little  difference  of  opinion.  All  must 
concede  their  gravity  to  be  'such  that  the  measure 
can  be  justified  only  on  the  ground  of  imperious  ne 
cessity. 

But  this  is  only  one  side  of  the  case.  The 
measure  was  adopted  under  the  pressure  of  a  great 
emergency ;  and  in  an  emergency  the  very  best  course 
may  be  productive  of  many  evils,  and  subject  to  a 
quarto  volume  of  objections.  Hence  it  will  be  pre 
mature  to  pass  judgment  on  it  until  we  have  in 
quired  whether  it  has  been  productive  of  any  good 
to  compensate  for  all  these  evils.  Have  these  notes 
enabled  us  to  put  more  men  into  the  field,  or  to 
build  more  ships  ?  Have  they  performed  any  im 
portant  office  'of  war,  which  could  not  have  been 


NECESSITY  OF  PAPEE  MONEY.         147 

performed  without  them?  Public  opinion  seems 
inclined  to  answer  these  questions  in  the  affirmative. 
What  is  the  foundation  of  this  opinion  ?  If  it  is 
correct  we  can  certainly  show  how  the  good  has 
been  effected.  But  a  satisfactory  exposition  of  the 
mode  of  operation  of  the  legal  tender  notes,  show 
ing  in  what  way  they  have  performed  the  functions 
of  money  better  than  coin,  or  notes  convertible  into 
coin,  is  a  desideratum  with  which  the  friends  of  the 
measure  have  never  supplied  us. 

In  the  absence  of  such  an  exposition  the  ques 
tion  must  be  considered  on  its  own  merits.  The 
two  great  authorities  to  which  we  appeal  are  reason 
and  experience.  The  friends  of  the  measure  are 
fond  of  appealing  in  a  vague  and  general  way  to 
experience,  by  saying  that  no  great  war  was  ever 
carried  on  without  paper  money.  A  refutation  of 
this  assertion  would  involve  us  in  a  useless  verbal 
dispute  unless  we  could  first  agree  what  wars  should 
be  considered  "  great  wars,"  and  what  sort  of  evi 
dences  of  indebtedness  should  be  considered  "  paper 
money."  Paper  money  has  indeed  been  used  as  a 
medium  of  exchange  in  some  great  wars,  and  it  is 
very  pertinent  to  our  present  purpose  to  inquire 
whether  it  has  aided  the  belligerents  in  their  efforts. 
The  three  "systems  of  paper  money  best  known  to  us 
are: — 

The  "  Continental  money  "  of  our  revolution. 

The  assignats  of  the  first  French  revolution. 

The  bank  money  of  England  during  the  Napo 
leonic  wars. 


148        NECESSITY  OF  PAPER  MONEY. 

The  last  is  so  essentially  different  from  the  other 
issues,  our  own  included,  that  no  instructive  com 
parison  can  be  made  with  it.  No  paper  money  was 
issued  by  the  British  Government  to  pay  off  its 
debts  except  very  limited  amounts  of  interest-bear 
ing  u  exchequer  bills."  The  circulating  notes  were 
issued  by  the  Bank  of  England,  which  was  alone 
responsible  for  their  redemption.  As  this  institu 
tion  always  held  in  specie,  and  the  notes  of  solvent 
individuals,  the  means  of  making  good  all  its  obli 
gations  whenever  the  law  restricting  specie  pay 
ments  should  be  repealed  or  cease  to  operate,  any 
serious  depreciation  of  the  notes  was  impossible  ex 
cept  as  a  result  of  bad  management  on  the  part  of 
the  bank,  or  a  panic  on  the  part  of  the  people.  It 
was  simply  an  instance  of  a  bank  suspension  of  spe 
cie  payments,  and  we  have  seen  how  different  this 
is  from  a  government  suspension.  Its  effect  was 
not,  like  the  latter,  to  encourage  the  exportation  of 
specie  in  exchange  for  luxuries,  but  to  keep  it  locked 
up  ready  for  any  emergency. 

The  paper  money  experience  of  our  revolution 
ary  ancestors  and  the  French  Republic  will  be  re 
viewed,  not  for  the  purpose  of  giving  a  detailed 
history  of  the  origin,  progress,  and  final  fall  of  the 
money,  but  to  learn  to  what  extent,  and  in  what 
way,  it  assisted  them  in  the  efforts  they  were  obliged 
to  make  to  maintain  their  governments,  and  to  see 
whether  our  circumstances  are  so  like  theirs,  that 
our  paper  money  extends  a  similar  help  to  us. 


NECESSITY   OF   PAPER   MONEY. 

The  Continental  Congress  first  authorized  the 
issue  of  certain  "  bills  of  credit "  in  1775.  These 
bills  were  paper  money,  pure  and  simple.  They 
bore  no  interest,  were  not  convertible  into  any  kind 
of  bonds,  were  not  secured  by  any  thing  but  the 
promise  of  the  power  which  issued  them,  and  after 
the  first  six  millions  were  issued  no  time  was  fixed 
for  their  redemption.  They  were  simple  certificates 
that  the  bearer  thereof  was  entitled  to  a  certain 
number  of  "  Spanish  milled  dollars."  After  the  is 
sue  exceeded  a  certain  limit,  the  inevitable  process 
of  depreciation  commenced.  It  continued  slowly, 
but  regularly,  throughout  the  whole  revolutionary 
war.  Every  fall  in  the  value  of  the  paper  gave  rise 
to  larger  and  larger  issues,  until,  finally,  $200,000,- 
000  of  it  were  in  circulation,  and  all  hope  of  its  re 
demption  vanished.  In  1781-'2  it  gradually  disap 
peared  from  circulation  altogether,  and  coin  flowed 
in  to  take  its  place.  ISTo  provision  was  ever  made 
for  its  redemption. 

These  are  the  essential  facts  of  the  case.  Our 
revolutionary  war  was  carried  on  and  brought  to  a 
successful  issue  by  means  of  this  depreciated,  depre 
ciating,  and  finally  worthless  paper  money.  But 
let  us  see  how.  Were  there  neither  taxes  nor  loans  ? 

With  the  issue  of  every  bill  a  loan  was  effected, 
and  a  debt  contracted.  When  Congress  bought 
from  an  individual  a  musket,  or  a  barrel  of  pork, 
giving  him  a  bill  in  exchange,  it  borrowed  from  him 
on  the  spot,  and  the  bill  was  the  certificate  of  in- 


150         NECESSITY  OF  PAPER  MONEY. 

debtedness.  Suppose  the  bill  was  worth  $20  in 
coin  when  issued,  and  that  when  the  holder  passed 
it  off  again  it  was  worth  but  $19,  then  he  virtually 
paid  a  tax  of  $1  toward  the  discharge  of  the  debt, 
and  received  $19  worth  of  some  article  for  the  re 
mainder.  If  the  bill  was  worth  but  $18  when  it 
changed  hands  again,  the  second  holder  paid  another 
dollar  tax,  as  he  received  but  $18  worth  of  goods 
for  it,  while  he  had  given  $19.  Thus,  the  bill  itself 
collected  a  tax  equivalent  to  its  depreciation  from 
every  man  through  whose  hands  it  passed.  'And 
since  every  bill  issued  must  have  been  held  by  some 
one  during  the  whole  time  it  was  depreciating  to 
nothing,  the  sum  "total  of  the  taxes  thus  collected 
must  have  been  the  equivalent  of  the  sum  total  of 
the  supplies  it  originally  purchased  for  the  Govern 
ment.  Thus  the  tax  was,  virtually,  a  very  irregular 
one  on  sales,  equivalent,  on  the  average,  to  the  per 
centage  of  depreciation  every  time  the  bill  changed 
hands. 

It  is  now,  I  hope,  perfectly  plain  that  so  far  as 
the  people  at  large  were  concerned,  they  could  just 
as  well  have  afforded  to  furnish  all  the  supplies 
bought  with  the  money  as  a  direct  tax ;  nay,  could 
have  afforded  them  much  better  in  this  form,  be 
cause  the  tax  could  have  been  graduated  so  as  to 
fall  more  equally.  As  was  remarked  in  a  previous 
chapter,  the  tax  was  apportioned  according  to  men's 
confidence  in  the  good  faith  of  the  country,  because, 
the  greater  this  confidence,  the  more  they  would  be 


NECESSITY  OF  PAPER  MONEY.         151 

disposed  to  hold  on  to  the  money  in  hope  of  its  final 
redemption. 

But  whether  that  assemblage  of  men  who  con 
stituted  the  Continental  Congress  could  have  put 
in  operation  a  system  of  taxation  which  would  have 
collected  the  supplies  bought  with  the  paper  money 
is  an  entirely  different  question.  Their  office  was 
advisory,  not  mandatory.  Any  laws  they  might  have 
enacted  would  have  had  to  depend  on  the  separate 
State  authorities  for  their  execution.  This  circum 
stance  alone  would  have  rendered  it  extremely  diffi 
cult  to  put  any  general  scheme  of  taxation  into  opera 
tion.  Again,  the  use  of  paper  money  was  a  most 
easy  and  certain  means  of  collecting  the  tax.  Neither 
assessors  nor  collectors  were  necessary.  There 
were  no  applications  for  abatement,  no  legal  tech 
nicalities  to  hinder  the  execution  of  the  law.  Once 
issue  the  note,  and  somebody  would  most  assuredly 
pay.  If  not  the  right  man,  then  the  wrong  one. 
Finally,  much  as  the  admission  may  reflect  on  the 
good  sense  of  our  ancestors,  it  must  be  conceded 
that  men  submitted  to  a  tax  in  this  form,  who 
would  not  willingly  have  submitted  to  one  so  heavy 
in  any  other  form. 

All  these  conclusions  harmonize  completely 
with  those  to  which  we  were  led  in  the  chapter  on 
"  the  financial  elements  of  military  strength."  It 
was  there  shown,  in  general,  that  the  military 
power  which  a  people  are  able  to  put  forth  is 
not  increased  by  the  money  circulating  through  the 


152        NECESSITY  OF  PAPER  MONEY. 

channels  of  business.  This  general  principle  is 
illustrated  by  the  fact  that  our  ancestors  really  paid 
as  heavy  taxes  to  carry  on  the  revolutionary  war 
as  if  no  paper  money  had  been  used.  If  they  had 
not  been  able  to  sustain  the  taxes  they  would  not 
have  been  able  to  furnish  the  supplies  in  exchange 
for  the  money. 

But  it  is  not  intended  to  maintain  that  no 
Government,  no  man  or  collection  of  men  endowed 
temporarily  or  permanently  with  authority,  can 
ever  add  to  their  power  by  an  issue  of  paper  money. 
In  proportion  as  the  Government  and  the  people 
constitute  two  separate  and  distinct  interests,  in 
that  same  proportion  may  circumstances  arise  to 
make  an  issue  of  paper  money  by  the  former  ad 
visable.  Thus  a  king,  who  finds  his  expenses  to 
exceed  his  income,  and  whose  subjects  are  more 
noted  for  lack  of  judgment  than  for  loyalty  •  or  a 
collection  of  men,  like  our  Continental  Congress, 
charged  with  the  interests  of  a  people,  but  unable 
to  put  the  machinery  of  taxation  into  operation,  may 
promote  their  objects  by  issuing  bills  of  credit, 
though  the  real  interests  of  the  country  will  most 
assuredly  suffer.  It  is  very  clear  that  the  relation 
of  the  Government  of  the  United  States  to  the  peo 
ple  thereof  is  not  of  either  of  these  characters.  Our 
Government  is  a  firmly-established  one,  with  prac 
tically  unlimited  power  to  levy  taxes.  Its  interests 
are  identical  with  those  of  the  people.  It  is  to  be 
sincerely  hoped  that  our  people  have  too  much 


NECESSITY   OF   PAPER   MONEY.  153 

good  sense  to  desire  to  be  cheated  out  of  a  tax 
which  they  would  not  pay  directly. 

Thus,  a  comparison  of  our  circumstances  with 
those  of  our  ancestors  does  not  indicate  that  our 
legal  tender  notes  were  either  necessary  or  expe 
dient.  Still  more  conclusive  is  the  experience  of 
the  French  Republic. 

The  "  assignats  "  and  "  mandats  "  of  the  French 
revolution  bore  a  greater  resemblance  to  our  legal 
tender  notes  than  any  other  well-known  system  of 
paper  money.  Substitute  government  bonds  for 
landed  estates,  and  the  resemblance  is  complete. 
The  circumstances  which  seemed  to  make  their  issue 
necessary,  were  of  the  same  general  nature  with 
those  which  gave  rise  to  our  notes,  only  the  diffi 
culties  of  the  situation  were  far  more  grave  and  far 
more  real.  Indeed,  the  deplorable  state  of  the 
French  finances  during  the  reign  of  Louis  XYI. 
was  one  great  cause  of  the  revolution.  The  taxes 
were  all  paid  by  the  <:  third  estate,"  the  nobles  and 
clergy  being  exempt.  They  were  so  heavy  in  pro 
portion  to  the  productive  powers  of  the  people,  that 
industry  was  nearly  paralyzed.  At  the  same  time 
the  expenses  of  the  Government  were  greatly  in  ex 
cess  of  its  revenue.  The  deficit  was  made  up  by 
"  farming  out "  future  taxes  to  capitalists  who  sup 
plied  the  Government  with  money  at  exorbitant 
rates  of  interest.  The  debt  thus  increased  from 
year  to  year,  without  any  corresponding  increase 
in  the  productive  power  of  the  people.  Specie  had 
7* 


154  NECESSITY   OF   PAPER   MONEY. 

almost  ceased  to  circulate.  The  king  had  to  coin 
his  plate  into  money.  The  wisdom  and  economy 
of  Neckar  were  insufficient  to  the  task  of  making 
both  ends  meet.  Such  was  the  state  of  affairs  when 
the  States-General  commenced  the  work  of  re 
modelling  the  Government  and  social  system  of 
France. 

The  first  vigorous  attempt  to  provide  a  remedy 
for  these  evils,  was  made  in  1790.  A  wholesale 
confiscation  of  the  entire  landed  property  of  the 
Church  was  decreed.  The  objects  of  the  Assembly 
are  thus  set  forth  by  Thiers : 

"  To  deprive  a  too  powerful  body  of  a  large  por 
tion  of  their  estates,  divide  these  estates  in  the  best 
possible  way,  so  as  to  allow  a  large  part  of  the 
poorer  classes  to  become  landed  proprietors ;  finally, 
by  the  same  operation  to  extinguish  the  public  debt, 
and  reestablish  order  in  the  finances:  such  was 
the  object  of  the  Assembly,  and  they  felt  its  im 
portance  too  strongly  to  cower  before  obstacles." 

But,  how  could  the  possession  of  landed  prop 
erty  be  made  to  contribute  to  the  military  power  of 
the  nation  ?  This  was  the  insoluble  problem  which 
the  Assembly  attacked.  It  was  perfectly  clear  that 
to  throw  such  quantities  of  land  on  the  market  at 
once  would  greatly  depress  its  price,  not  only  from 
lack  of  disposition  on  the  part  of  the  people  to  buy 
so  much,  but  from  lack  of  ability  to  pay  for  it.  So 
the  attempt  was  made  to  obtain  the  value  of  the 
lands  indirectly,  by  issuing  assignats,  evidences  of 


NECESSITY  OF  PAPER  MONEY.         155 

indebtedness,  bearing  a  certain  daily  interest,  and 
entitling  the  holder  to  confiscated  lands  equal  in 
value  to  the  face  of  the  note,  just  as  our  notes  en 
title  the  holders  to  certain  United  States  bonds, 
To  give  them  a  still  greater  value,  they  were  de 
clared  a  legal  tender.  Neckar,  warning  the  Assem 
bly  of  the  consequences  of  the  measure,  was  thrown 
overboard,  and  finally  compelled  to  flee  the  coun 
try,  much  as  a  young  profligate  might  dismiss  his 
physician  for  pointing  out  the  inevitable  conse 
quences  of  his  acts. 

At  first,  the  new  scheme  worked  well,  as  such 
schemes  always  do.  The  people  were  delighted  to 
be  relieved  from  the  visits  of  the  tax  gatherer.  The 
assignats  paid  off  the  public  creditors,  purchased 
army  supplies,  and  kept  the  Government  going. 
They  furnished  the  people  with  money ^  the  great  na 
tional  want.  Yery  soon,  however,  the  nation  had  all 
the  money  it  wanted,  and  thereafter  the  assignats 
must  depend  for  their  value,  not  on  being  a  legal 
tender,  but  on  being  convertible  into  land,  of  which 
they  were  the  representative.  The  falsity  of  the 
theory  on  which  they  were  issued,  now  became 
manifest.  The  Assembly  did  not  want  to  glut  the 
market  with  land,  so  they  glut  it  with  the  represent 
ative  of  land  instead.  How  the  representative 
could  have  a  greater  value  than  the  thing  repre 
sented  ;  why  any  man  would  give  a  larger  consid 
eration  for  a  certificate  entitling  him  to  land  than 
he  would  for  the  land  itself,  they  did  not  ask. 


156         NECESSITY  OF  PAPER  MONEY. 

The  baneful  effects  which  followed,  the  con 
tinual  rise  in  price  of  all  the  necessaries  of  life ;  the 
almost  total  stoppage  of  productive  industry,  and 
the  substitution  of  attempts  to  make  money  by  any 
other  means  than  honest  industry,  the  only  real 
source  of  wealth ;  the  vain  attempts  of  the  Conven 
tion,  backed  by  the  mob  and  the  guillotine,  to  fix 
a  maximum  of  prices ;  the  rage  and  misery  of  the 
half-starved  populace  ;  all  these  illustrate  the  folly 
of  human  nature,  but  do  not  prove  that  the  assig- 
nats  really  did  no  good  whatever  for  the  Eepublic. 

The  circumstances  of  their  fall  are  conclusive  on 
this  point.  A  defect  in  their  form,  which  in  fact 
was  pointed  out  by  Neckar  when  they  was  first 
proposed,  became  evident  during  their  depreciation. 
The  land  in  which  they  were  redeemable  rose  in 
price  with  every  thing  else  (though,  of  course,  not 
in  the  same  ratio),  so  that  in  1796  an  assignat  would 
buy  a  small  fraction  of  the  land  it  would  have  bought 
originally.  To  remedy  this  objection  the  assignats 
were  withdrawn,  and  the  "  mandate "  were  issued 
in  lieu  of  them,  at  the  rate  of  one  franc  in  mandats 
for  twenty  in  assignats.  The  new  bills  entitled  the 
holder  to  receive  the  lands  at  their  valuation  in 
1T90.  They  therefore  bore  the  same  relation  to  the 
assignats  that  our  original  legal  tender  notes,  ex 
pressly  convertible,  dollar  for  dollar,  into  five-twen 
ty  bonds,  bear  to  the  present  notes,  which  are  merely 
receivable  in  payment  of  loans,  on  any  terms  the 
Government  may  prescribe.  But  the  people  had 


NECESSITY  OF  PAPEK  MONEY.        "157 

become  so  disgusted  with  the  paper  money  that 
the  mandats  did  not  circulate  as  many  months  as  the 
assignats  had  years.  Kefused  by  all  as  money, 
they  were  bought  up  by  speculators  for  investment 
in  lands.  After  a  vain  contest,  the  Directory  were 
obliged  to  give  way  and  return  to  a  specie  basis. 
The  mandats  were  received  and  paid  out  by  the 
Government  only  at  their  market  rates  for  coin, 
which  soon  became  the  only  currency  of  the  nation. 

This  happened  in  1796,  in  the  midst  of  the  first 
Italian  campaign,  when  the  twenty  years'  struggle 
of  France  with  the  other  European  powers  wras 
but  fairly  begun.  If  our  modern  theories,  or  ra 
ther  our  modern  rejuvenation  of  old  theories,  of  the 
necessity  of  paper  money  are  correct,  this  downfall 
of  the  circulating  medium  must  have  been  dis 
astrous  in  the  extreme.  But,  so  far  is  this  from 
being  the  case,  that  productive  industry  rapidly  re 
covered-  from  the  depression  of  the  paper  money. 
Men  raised  corn  and  made  bread  in  full  confidence 
that  no  mob  would  punish  them  for  their  pains,  by 
compelling  them  to  part  with  it  for  worthless  rags. 
The  war  was  continued  nineteen  years  without 
any  attempt  to  issue  more  paper  money,  and  from 
1796  till  now  nothing  but  coin  has  been  a  legal 
tender  in  France. 

Looking  back,  then,  at  the  actual  effects  of  paper 
money  in  past  generations,  and  at  the  actual  ser 
vices  rendered  by  it ;  weighing  justly  all  its  bene 
fits  and  all  its  evils,  it  must  be  conceded  that  it 


158'  NECESSITY   OF  PAPER  MONEY. 

warns  us  to  avoid  it  much  more  forcibly  than  it  in 
vites  us  to  adopt  it,  and  that  it  has  never  lent  to 
any  Government  a  help  of  which  we  were  in  need 
when  we  tried  it.  It  has  simply  proved  the  intoxi 
cating  cup  of  nations.  As  a  bottle  of  wine  seem 
ingly  invigorates  the  laborer,  and  diffuses  new  life 
through  every  vein,  so  does  an  issue  of  irredeema 
ble  paper  money  stimulate  commerce,  and  give  a 
new  impulse  to  business  of  almost  every  kind.  The 
first  effects  are  so  good  that  a  universal  cry  for  more 
soon  rises  from  the  entire  body  politic.  Govern 
ment  is  certain  to  yield  to  the  temptation.  More  is 
issued,  and  yet  more.  The  point  at  which  the  stim 
ulus  becomes  clearly  unhealthy  is  as  well  marked  in 
the  case  of  the  nation  as  in  that  of  the  individual. 
There  is  a  universal  disposition  to  T)uy,  a  universal 
demand  for  money  to  buy  with,  but  a  growing  in 
disposition  to  make  or  produce  by  honest  industry. 
When  this  state  of  things  reaches  its  inevitable 
termination,  the  depression  is  as  great  as  was  the 
previous  excitement.  As  the  bones,  muscles,  and 
nerves  of  the  individual  are  still  entire  after  a  fit  of 
drunkenness,  so  are  the  nation's  elements  of  mate 
rial  wealth.  But  the  elements  of  moral  power, 
which  alone  can  make  wealth  contribute  to  our  real 
happiness,  are  destroyed.  Mutual  confidence,  pub 
lic  faith,  private  honor,  frugal  industry,  all  are  gone 
like  the  nervous  energies  of  the  drunkard. 


1,1  II  U  A  u   i 

UKJVKKS1TY   OF 


CHAPTEE  VII. 

WERE   THE   LEGAL   TENDER   NOTES   NECESSARY? 

HAVING  seen  to  what  extent  the  issue  of  our  cir 
culating  notes  is  sustained  by  the  precedents  of  his 
tory,  it  is  now  proposed  to  consider  them  on  their 
own  merits,  and  examine  the  official  arguments  with 
which  they  have  been  sustained.  The  measure  pre 
sents  four  features  which,  for  the  sake  of  clearness, 
will  be  considered  separately.  The  questions  to 
which  these  features  give  rise  are  as  follows  : 

1.  Was  it  expedient  to  issue  notes  at  all  ? 

2.  Was  it  necessary  that  they  should  not  be  re 
deemable  in  coin  ? 

3.  That  they  should  be  a  legal  tender  for  the 
principal  of  the  public  debt  ? 

4.  That  they  should  be  a  legal  tender  in  pay 
ment  of  private  debts  ? 

That  the  issue  of  notes  sufficient  in  amount  to 
form  the  entire  circulating  medium  of  the  country 
was  expedient,  cannot,  I  think,  be  successfully  con 
troverted.*  Such  an  issue  is  equivalent  to  a  loan 

*  It  will  be  understood  that  the  discussion  of  constitutional  objec- 


160      WEKE   LEGAL   TENDER   NOTES    NECESSARY  ? 

from  the  people  of  its  entire  amount,  without  inter 
est.  Before  the  war  this  advantage  had  been  mo 
nopolized  by  the  banks,  and  Mr.  Chase,  in  his  first 
annual  report  (December,  1861)  well  remarks  that 
"  it  deserves  consideration  whether  sound  policy 
does  not  require  that  the  advantages  of  this  loan  be 
transferred,  in  part,  at  least,  from  the  banks,  repre 
senting  only  the  interests  of  the  stockholders,  to  the 
Government  representing  the  aggregate  interests  of 
the  whole  people."  It  is  hard  to  see  why,  when 
the  Government  was  in  so  great  a  strait,  the  entire 
advantages  of  the  loan  should  not  have  been  trans 
ferred  to  it.  Let  us  look  at  the  exact  nature  of 
this  loan,  as  much  misapprehension  exists  respect 
ing  it. 

Its  maximum  amount  may  vary  from  $200,- 
000,000  to  $300,000,000.  The  real  advantages 
which  it  is  possible  to  obtain  from  the  issue  of  cir 
culating  notes  are  exhausted  when  their  amount 
reaches  this  limit.  Issue  more,  and  they  will  come 
back  for  redemption  if  redeemable,  or  depreciate  if 
they  are  not.  We  may,  indeed,  in  the  latter  case, 
adopt  the  miserable  plan  of  recklessly  issuing  more 
and  more,  thus  collecting  an  indirect  tax  by  their 
depreciation,  as  our  revolutionary  forefathers  did. 
In  that  case,  however,  we  must  finally  either  repu- 
,  diate  the  notes,  or  redeem  them  by  collecting  the 

tions  to  an  issue  of  notes  by  the  Government  is  foreign  to  our  present 
purpose.  Taking  the  power  to  issue  notes  for  granted,  we  are  only 
inquiring  how  far  it  is  expedient  to  exercise  it. 


WERE    LEGAL   TENDER   NOTES    NECESSARY?         1G1 

tax  all  over  again  for  the  benefit  of  the  last  hold 
ers. 

I  repeat  it :  a  loan  of  say  $250,000,000,  during 
the  pleasure  of  the  Government,  without  interest,  is 
the  sole  advantage  to  be  derived  from  the  issue  of 
notes.  After  this  loan  is  contracted,  we  are  in  the 
same  position  with  respect  to  future  loans  as  if  no 
notes  at  all  had  ~been  issued.  Unfortunately,  how 
ever,  the  notes  were  expected  also  to  facilitate  new 
loans.  Such  a  mistake  could  never  have  been  made 
by  any  one  who  knew  enough  of  political  economy 
to  have  a  clear  comprehension  of  the  functions  of 
money.  But  for  it  we  should  never  have  expe 
rienced  any  of  the  evils  of  a  redundant  currency. 
That  it  was  made  and  acted  on  is  evident  from  the 
tenor  of  Mr.  Chase's  first  two  annual  reports.  In 
his  report  of  December,  1862,  he  says,  with  refer 
ence  to  the  possibility  of  negotiating  loans  of  coin 
ten  months  before : 

"  Careful  inquiries  satisfied  the  Secretary  that 
the  first  §60,000,000  could  not  be  had,  in  coin,  at 
better  rates  than  a  dollar  in  bonds  for  eighty  cents 
in  money  ;  and  that  each  succeeding  loan  would  in 
volve  submission  to  increasingly  disadvantageous 
terms.  To  obtain  the  first  $60,000,000  would  re 
quire,  therefore,  an  issue  of  bonds  to  the  amount  of 
$75,000,000,  and,  of  course,  an  increase  of  the  pub 
lic  debt  by  the  same  sum  ;  the  next  $60,000,000 
would  require  perhaps  $90,000,000  in  bonds  and 
debt ;  and  the  next  $60,000,000,  if  obtainable  at 


162      WERE   LEGAL   TENDER   NOTES   NECESSARY  ? 

all,  would  require  perhaps  $120,000,000.  It  was 
easy  to  see  that  on  this  road  utter  discredit  and 
paralysis  would  soon  be  reached.  The  adoption  of  a 
plan  of  finance  involving  such  consequences  was  not" 
compatible  with  the  Secretary's  ideas  of  public  duty." 

This  specification  of  the  terms  on  which  the 
Government  could  borrow  coin  is  not  quoted  for 
the  purpose  of  refuting  it,  because  its  correctness 
does  not  affect  the  question  under  discussion.  But 
it  may  be  remarked,  parenthetically,  that  events 
have  shown  the  disadvantages  which  would  have 
attended  loans  of  coin  to  be  greatly  exaggerated. 
The  "  inquiries  "  seem  to  have  been  made  at  a  mo 
ment  of  great  general  depression.  Two  months  after 
they  were  made,  and  eight  months  before  their  re 
sult  was  communicated  to  Congress  in  the  above 
paragraph,  the  six  per  cent,  bonds  brought  very 
nearly  par  in  coin,  as  will  be  seen  from  the  table  on 
pages  108, 109  (Chapter  IV.).  And  in  1863,  when, 
had  the  results  of  the  inquiry  been  correct,  the 
bonds  would  have  been  worth  but  fifty  per  cent,  in 
coin,  they  were  worth  eighty.  Moreover,  subse 
quent  experience  has  shown  that  the  skilful  nego 
tiation  of  sixty  millions  of  bonds  at  once  need  not 
depress  their  price  more  than  five  per  cent. 

A  skilful  negotiation  is  one  conducted  so  as  to 
avoid  the  accumulation  of  large  quantities  of  coin. 
It  is  not  denied  that  if,  in  effecting  the  three  loans 
of  coin  of  $60,000,000  each,  the  policy  of  the  Treas 
ury  had  been  to  keep  all  the  coin  locked  up,  in- 


WEKE   LEGAL 'TENDER  NOTES   NECESSARY?       163 

stead  of  paying  it  out,  the  effects  might  have  been 
as  unfavorable  as  the  honorable  Secretary  had  pre 
dicted.  But  if  the  gold  had  been  disbursed  as  fast 
as  received,  it  would  have  been  just  as  available  for 
a  new  loan  as  it  was  before,  so  that  the  price  of  the 
bonds  could  have  fallen  only  in  consequence  of  a 
real  depreciation  of  the  government  credit. 

But  whether  the  amount  of  bonds  necessary  to 
command  §180,000,000  in  coin  would  or  would  not 
have  been  as  great  as  estimated,  does  not  affect  the 
question  now  under  discussion.  The  only  logical 
conclusion  from  the  Secretary's  statement  was  that 
it  would  never  do  to  attempt  the  sale  of  bonds  at 
all.  Unfortunately,  however,  instead  of  accepting 
this  conclusion,  he  goes  on  to  consider  whether  it 
would  be  advisable  to  receive  the  notes  of  the  State 
banks  in  lieu  of  coin,  and  gives  very  forcible  reasons 
in  the  negative,  which,  however,  derive  their  whole 
force  from  the  circumstance  that  the  banks  had  sus 
pended  specie  payments.  Finally,  he  concludes  that 
in  the  legal  tender  notes  we  have  a  currency  "  with 
which,  until  the  close  of  the  war  at  least,  loans  and 
taxes  may  be  paid  to  the  Government,  debts  to  indi 
viduals  discharged,  and  the  business  of  the  country 
transacted."  In  all  this  it  is  implied  that  some 
kinds  of  currency  may  be  employed  more  advan 
tageously  -than  others  in  the  negotiation  of  bonds. 

Kow,  no  principle  of  Political  Economy  is  more 
firmly  established,  both  by  reason  and  experience, 
than  this  r  that  money  is  not  a  creator  of  value,  and 


164      WERE   LEGAL   TENDER  NOTES   NECESSARY? 

can  never  permanently  alter  the  relative  value  of 
commodities.  To  apply  this  principle  to  the  present 
case,  let  us  admit  that  while  there  is  in  existence  in 
the  country  a  certain  amount  of  gold,  $100  in  bonds 
would  have  brought  in  the  market  only  $50  in  coin. 
To  give  the  advocates  of  the  currency  as  strong  a 
case  as  possible,  let  us  suppose  that  under  the  same 
circumstances  the  bond  could  be  sold  for  $100  in 
currency.  What  would  follow  ?  Simply  this,  that 
$50  in  gold  would  be  worth  in  the  market  as  much 
as  $100  in  paper  ;  and  that  the  former  would  there 
fore  be  at  100  per  cent,  premium.  "No  one  can 
maintain  that  $100  in  paper  and  $50  in  coin  can  be 
the  market  equivalent  of  the  same  thing,  and  yet 
not  the  equivalent  of  each  other.  And  gold  being 
at  100  per  cent,  premium,  of  course  $100  in  gold 
will  buy  as  much  flour,  clothing,  gunpowder,  or 
iron,  as  $200  in  paper.  In  one  word,  if  the  coun 
try  is  more  willing  to  loan  paper  than  gold,  it  can 
be  only  because  it  values  the  gold  higher  than  the 
paper ;  and,  this  being  the  case,  it  will  give  more 
munitions  of  war  for  the  gold  than  for  the  paper  in 
exactly  the  same  proportion. 

It  is  very  true  that  the  Government  could  pay 
off  old  debts  with  a  smaller  issue  of  bonds  by  issu 
ing  depreciated  paper,  for  the  simple  reason  that 
the  creditors  could  not  help  themselves.  Thus,  for 
a  long  time  after  gold  rises,  Government  may  by 
this  system  be  in  the  actual  receipt  of  goods  at  old 
prices.  But,  in  contracting  future  debts,  we  may 


WERE   LEGAL   TENDEK   NOTES   NECESSARY?       165 

be  sure  that  tlie  contractor  will  charge  for  the  de 
preciation,  if  he  does  not  add  on  a  good  percentage 
in  addition  to  compensate  himself  for  the  uncertain 
ty.  Finally,  when  gold  falls,  Government  will  have 
to  pay  high  prices  for  about  the  same  length  of  time 
it  paid  low  prices  during  the  rise,  so  that  in  the  end 
the  compensation  will  be  complete. 

If  Government  does  not  now  give  twice  as  much 
for  every  thing  it  wants  as  at  the  beginning  of  the 
war,  the  fact  affords  no  argument  against  the  posi 
tion  laid  down.  The  large  scale  on  which  we  are 
now  manufacturing  war  material ;  the  labor-saving 
devices  which  have  been  introduced  ;  the  introduc 
tion  of  female  labor ;  the  efforts  of  the  country  to 
supply  its  armies  in  the  most  economical  way ;  all 
these  circumstances  operate  to  make  the  absolute 
cost  of  war  material  much  less  than  in  the  begin 
ning,  when  we  were  suddenly  called  upon  for  these 
immense  supplies  without  any  previous  preparation. 
Consequently,  had  specie  payments  been  continued, 
it  is  reasonably  to  be  expected  that  we  should  now 
be  manufacturing  war  material  at  a  much  cheaper 
rate  than  at  first.  What  is  maintained  is,  that  now 
we  are  paying  twice  as  high  for  every  thing  wre  buy 
as  if  we  paid  in  gold.  Even  if  we  could  not  buy 
half  as  cheap  for  gold  directly,  we  could  indirectly 
by  selling  the  gold  for  notes  to  buy  with. 

What  the  Government  really  gives  in  exchange 
for  its  supplies  is  its  bonds,  as  a  shoemaker  really 
supplies  himself  with  necessaries  by  making  shoes. 


166      WERE   LEGAL   TENDER   NOTES   NECESSARY? 

The  money  which  is  paid  into  the  Treasury  for 
bonds,  and  then  paid  out  again  for  supplies,  serves 
no  purpose  except  that  of  making  and  equalizing 
the  exchanges,  and  enabling  the  Government  to 
buy  from  the  cheapest  market,  whether  the  seller 
wants  bonds  or  not,  and  to  sell  bonds  to  the  highest 
bidder,  whether  that  bidder  can  furnish  supplies  or 
not.  If  the  contractors  who  supply  the  Govern 
ment  were  the  same  persons  who  wanted  all  the 
bonds,  there  would  be  no  need  at  all  of  money. 

Thus,  the  only  necessary  restrictions  respecting 
the  money  with  which  loans  should  be  negotiated, 
are  those  imposed  by  considerations  of  convenience, 
namely,  (1)  that  the  money  should  be  easy  to  handle, 
(2)  of  equal  value  at  all  times,  and  (3)  of  equal 
value  all  over  the  country.  The  first  condition  is 
best  fulfilled  by  paper,  but  coin  would  be  subject  to 
110  serious  inconvenience  in  this  respect,  because 
all  large  payments  to  or  from  the  Government 
would  have  been  made  by  checks,  without  actually 
handling  the  coin. 

By  some  singular  hallucination,  it  seemed  to  be 
taken  for  granted  that  after  the  suspension  of  specie 
payments  it  was  no  longer  possible  for  the  Govern 
ment  to  borrow  coin.  This  was  considered  the  fun 
damental  fact  on  which  our  policy  would  have  to  be 
based.  Gold  had  "  disappeared  !  "  A  stranger, 
ignorant  of  chemistry,  would  have  derived  the  im 
pression  that,  through  some  carelessness  on  the  part 
of  the  public,  our  $300,000,000  in  gold  had  all  been 


WERE    LEGAL   TENDER   NOTES   NECESSARY?       167 

suffered  to  evaporate.  But  the  gold  was  still  in  the 
hands  of  the  people  and  the  banks.  The  very  fact 
that  it  had  disappeared  from  circulation,  ought  to 
make  it  more  easy  to  borrow  large  sums,  because  the 
owners  no  longer  needed  it  for  money,  and  therefore 
could  all  the  better  afford  to  lend  it.  It  is  very  true 
that  during  the  temporary  panic  caused  by  the  suspen 
sion,  there  would  have  been  a  general  disposition  to 
hold  on  to  gold  rather  than  pass  it  off  at  par.  But 
why  ?  Simply  for  fear  on  the  part  of  the  owners 
that  Government  would  acquiesce  in  the  suspension, 
for  fear  gold  would  be  at  a  premium,  for  fear  that 
if  they  parted  with  it  they  would  not  get  it  back 
again  ;  in  one  word,  for  fear  of  the  very  things  that 
actually  were  done !  To  conquer  this  difficulty  it 
was  only  necessary  for  the  Government  to  exhibit  a 
bold  and  inflexible  determination  to  continue  its  op 
erations  on  a  specie  basis,  irrespective  of  the  doings 
of  the  banks,  and  thus  dispel  the  fears  in  question. 
The  holders  of  gold  would  soon  have  found  it  to  be 
only  so  much  idle  capital  lying  on  their  hands,  and 
would  therefore  have  been  desirous  to  exchange  it 
for  something  which  would  yield  a  profit.  Yet,  so 
deeply  has  the  opinion  in  question  taken  root,  that 
although,  during  the  past  year,  every  dollar  in  gold 
which  the  Government  could  command  would  can 
cel  from  two  to  two  and  a  half  dollars  of  the  public 
debt,  not  the  slightest  attempt  has  been  made  to 
command  that  coin,  either  by  loans  or  taxes. 


168      WERE   LEGAL   TENDER  NOTES   NECESSARY? 

The  table  on  page  169  shows  the  coin  price  at 
which  the  six  per  cent,  twenty-year  bonds  were  actual 
ly  held  in  the  market.  Had  specie  payments  been  con 
tinued,  bonds  could  always  have  been  negotiated  for 
at  least  this  sum  in  specie,  to  the  extent  to  which 
they  actually  were  negotiated  in  notes.  Probably 
they  would  have  brought  a  much  higher  price,  as 
the  two  great  depressing  causes  which  have  dimin 
ished  the  value  of  all  government  securities  would 
not  have  existed.  These  causes  are : 

1.  The  suspension  of  specie  payments,  thereby 
establishing  the  principle  that  if  it  were  not  conven 
ient  to  pay  a  debt  when  due,  payment  might  be 
indefinitely  deferred ;  and  the  passage  of  the  act  de 
claring  irredeemable  paper  money  a  legal  tender  for 
the  entire  principal  of  the  public  debt. 

2.  The  depreciation  of  the  currency,  causing 
enormous   profits  to  accrue  from  commercial  and 
speculative    ventures,    thus    discouraging    invest 
ment    in    securities   which    only    pay  reasonable 
dividends. 

The  manner  in  which  each  of  these  causes  has 
operated  to  diminish  the  market  value  of  Govern 
ment  securities  has  been  fully  set  forth  in  the  fourth 
and  fifth  chapters.  Allowing  for  their  probable  ef 
fect,  our  financial  history  as  it  would  have  been  had 
specie  payments  been  continued,  and  no  notes  is 
sued,  compared  with  what  it  has  been,  is  shown  in 
the  following  table : 


WERE   LEGAL   TENDER   NOTES   NECESSARY  ?       169 


(1)          (2)          (3)          (4) 


•§ 

a 

^ 

-i 

£ 

£ 

I 

-g 

1 

1 

i 

1 

1 

sj? 

1 

&) 

•3 

o 

• 

"Ed 

^1 

34 

oa 

|i 

|| 

f  J 

.S«a 

§  S 

&a 

1  • 

S5§ 

§3  o 

» 

>3 

H 

2 

PH 

A 

fist  Quarter 

80 

20 

1.00 

.80 

20 

J  2d        " 

90* 

10 

1.00 

.90 

10 

1862.  <  3(j        lt 

83 

17 

1.10 

.91 

9 

[4th       " 

78 

22 

1.15 

.89 

11 

fist       " 

71  f 

29 

1.20 

.85 

15 

1863;   I  2d        | 

77 

23 

1.40 

1.08 

8 

82 

18 

1.35 

1.10 

10 

[4th      ' 

82  { 

18 

1.30 

1.07 

7 

{1st       ' 

75 

25 

1.40 

1.05 

5 

2d        ' 
3d        < 

70 
67 

30 
33 

1.80 
2.40 

1.26 
1.60 

26 
60 

4th      " 

70 

30 

2.40 

1.68 

68 

Taking  an  average  each  three  months,  it  shows : 

1.  The  price  at  which  bonds  and  certificates  of 

indebtedness  could  have  been  negotiated  for  coin, 

*  At  this  time  bonds  were  worth  nearly  par  in  coin,  but  this  is 
because  Government  put  none  on  the  market,  issuing  legal  tender 
notes  to  the  public  creditors.  The  brilliant  victories  in  the  spring  of 
1862  caused  a  great  rise  in  the  value  of  government  securities. 

•J-  The  public  mind  desponded,  owing  to  the  ill  success  of  our  arms 
during  the  past  six  months.  Bonds  in  consequence  very  low. 

\  The  victories  of  the  past  summer  seem  to  presage  the  speedy 
fall  of  the  rebellion.  Lee  is  driven  from  Pennsylvania ;  Vicksburg, 
Chattanooga,  and  Port  Hudson  have  fallen ;  and  "  the  men  of  the 
West  have  hewn  their  way  to  the  Gulf  of  Mexico  with  their  swords." 
There  is  another  rise  in  bonds,  which,  unfortunately,  is  only  tempo 


rary. 


8 


170      WERE   LEGAL   TENDER  NOTES   NECESSARY? 

or  notes  convertible  into  coin,  as  compared  with  the 
price  in  the  notes  actually  used. 

2.  The  nominal  loss  per  cent,  in  the  negotiation, 
to  which  the  Government  would  have  been  obliged 
to  submit  in  consequence  of  employing  coin  instead 
of  notes.     It  is  found  by  subtracting  the  preceding 
column  from  100,  which  represents  the  price  the 
bonds  actually  brought  in  paper. 

3.  The  buying  power  of  the  gold,  compared 
with  that  of  paper  generally,  put  lower  than  the 
price  of  gold,  because  there  are  many  payments, 
such   as   salaries   and  old  debts,  for  which  paper 
•has,  up  to  the  present  time,  been  nearly  as  good  as 
coin. 

4.  Multiplying  the  columns  (1)  and  (3)  we  have 
the  percentage  of  indebtedness  actually  incurred 
compared  with  what  would  have  leen  incurred  had 
specie  payments  been  adhered  to.     It  will  be  ob 
served  that  up  to  the  first  quarter  of  1863  there  is 
a  steady  gain  from  the  issue  of  notes;  after  that  time 
a  continual  loss,  which,  however,  does  not  become 
very  serious  until  1864.     The  loss  is  now  increasing 
in  a  most  alarming  ratio. 

Had  a  specie  basis  been  maintained,  we  should 
probably  have  incurred  an  indebtedness  of  about 
$150,000,000  in  each  quarter.  The  gradually  di 
minishing  amount  of  coin  which  this  amount  of  in 
debtedness  would  have  secured  us,  would  have  been 
compensated  by  the  increasing  revenue  from  taxes, 


WEBE   LEGAL   TENDER   NOTES   NECESSARY?       171 

and  the  increasing  cheapness  of  war  material.  The 
gain  and  loss  in  dollars  from  the  use  of  legal  tender 
notes  may  therefore  be  estimated  as  follows,  for  each 
quarter : 


Gain. 

Loss. 

1862. 

fist  Quarter- 
2d 
1  3d 
[4th 

$30,000,000 
15,000,000 
14,000,000 
16,000,000 

1863. 

fist 
I  2d 
1  3d 
[4th 

22,000,000 

$12,000,000 
15,000,000 
10,000,000 

1864. 

fist 
J  2d 
]  3d        " 
[4th       " 

8,000,000 
39,000,000 
90,000,000 
102,000,000 

Thus,  according  to  the  best  judgment  we  can 
form,  we  saved  $97,000,000  in  indebtedness  by  the 
use  of  notes  during  the  first  year  after  their  issue. 
This  was  saved  because  the  notes,  answering  the 
purpose  of  money,  were  more  acceptable  than  bonds 
would  have  been,  and  because  we  were  enabled  to 
pay  off  contracts  made  when  gold  was  at  par  with 
notes  after  they  had  depreciated  one-third. 

But,  since  that  time,  up  to  the  end  of  1864,  we 
have  not  only  lost  that  $97,000,000,  but  $180,000,- 
000  in  addition.  At  the  end  of  this  period  the  loss 
is  peculiarly  great,  because  we  are  paying  debt  con 
tracted  when  gold  was  at  260  with  an  appreciated 
currency. 


172      WEKE   LEGAL   TENDER   NOTES   NECESSARY  ? 

In  1865  we  shall  probably  incur  an  indebted 
ness  $300,000,000  greater  than  we  should  had  we 
adhered  to  the  specie  standard,  though  the  war 
should  end  immediately,  because  we  will  have  to 
pay  debts  in  the  appreciated  currency. 

Thus,  owing  to  the  unfortunate  misconception 
of  the  true  object  of  the  notes,  a  misconception 
founded  upon  a  total  ignorance  of  the  functions  of 
money,  and  the  laws  which  in  practice  regulate  its 
value,  a  measure  which  might  have  been  a  limited 
source  of  good  has  been  made  to  work  us  infinite 
mischief.  The  object  of  the  notes  was  not  to  fur 
nish  the  country  with  money  to  buy  bonds  with, 
but  to  obtain  as  large  a  loan  as  possible  without 
interest.  If  the  notes  were  not  redeemable  on  de 
mand,  it  was  not  only  unnecessary,  but  highly  mis 
chievous,  that  they  should  have  been  universally 
receivable  for  loans.  - 

The  fact  that  our  finances  are  in  a  far  worse  con 
dition,  and  we,  as  a  people,  morally  weaker  than  if 
we  had  never  issued  a  government  note,  is  of  itself 
a  suificient  answer  to  the  question  whether  the  notes 
were  necessary. 

II.  Was  it  necessary  that  the  notes  should  not  tie 
redeemable  in  coin  f  That  it  was  desirable  to  pro 
vide  means  for  redemption  of  the  notes,  no  one  will 
dispute.  In  no  other  safe  way  could  they  be  kept 
froni  the  depreciation  and  continual  fluctuations  in 
value,  which  experience  has  shown  to  be  the  uni 
versal  lot  of  every  system  of  irredeemable  paper 


WEEE   LEGAL   TENDER   NOTES   NECESSARY?       173 

money,  and  which  reason  tells  us  must  be  its  lot,  so 
long  as  human  nature  remains  as  it  is.  In  fact, 
redeeming  the  paper  is  the  only  practical  mode  of 
fixing  its  value.  If,  in  the  opinion  of  the  Govern 
ment,  its  obligation  expressed  by  the  note  is  as 
valuable  as  coin,  then  it  will  be  willing  to  give 
coin  in  exchange  for  it.  If  it  values  the  obligation 
at  fifty  cents  on  the  dollar,  fifty  cents  on  the  dol 
lar  it  will  give  to  be  relieved  from  the  obligation. 
At  the  present  moment  there  are  millions  of  dol 
lars  of  notes,  the  holders  of  which  would  be  glad  to 
resign  them  to  the  Government  at  fifty  cents  on 
the  dollar,  but  the  Government  will  not  give  it !  It 
is  perfectly  idle  for  Congress,  or  any  other  power,  to 
enact,  or  proclaim,  that  a  note  has  any  definite  value, 
while  it  is  belieing  its  own  words  by  its  acts.  . 

It  was  not  necessary,  however,  that  they  should 
have  been  absolutely  redeemable  in  coin  on  demand. 
"We  might  have  adopted  Eicard's  plan  of  redeeming 
them  in  bullion ,  instead  of  coin,  or  the  less  philosoph 
ical,  but  probably  more  advisable  plan  of  redeem 
ing  them  in  a  certain  specified  time,  say  sixty  days 
after  demand.  Then,  each  holder  of  a  note,  on 
surrendering  it  to  the  Treasury,  would  have  received 
a  check  payable  in  coin  in  sixty  days.  The  money 
necessary  to  redeem  the  notes  would  have  been 
raised  by  loans  and  taxation.  When  the  Treasury 
was  not  pressed,  it  might  have  been  advisable  to 
receive  checks  which  had  already  run  over  thirty 
days  in  payment  of  loans,  and  probably  four-fifths 


174:      WERE   LEGAL   TENDER   NOTES   NECESSARY  ? 

of  the  checks  would  have  been  cancelled  in  this 
way. 

All  danger  of  panics  would  in  this  way  have 
been  avoided.  Circulating  money  of  some  kind,  to 
the  amount  of  at  least  $200,000,000,  the  country 
must  and  will  have.  Suppose  a  panic-stricken  pub 
lic  do  rush  to  the  Treasury  with  notes  in  such 
quantities  that  less  than  this  amount  was  left  in 
circulation  ;  in  a  few  days  a  great  scarcity  of  cur 
rency  will  be  felt.  Notes  will  become  as  valuable 
as  gold,  and  holders  of  coin  checks  will  be  glad  to 
withdraw  their  demands  for  redemption,  and  ex 
change  the  checks  back  again  for  the  note,  to  which, 
of  course,  the  Government  would  have  no  objection. 
After  going  through  this  operation  two  or  three 
times,  every  one  will  be  careful  not  to  present 
notes  for  redemption,  unless  he  has  more  on  hand 
than  he  will  have  occasion  to  pay  out  during  the 
next  sixty  days.  When  every  one  does  this,  over 
$200,000,000  will  be  reserved  in  all,  and  this 
amount  will  finally  be  retained  in  circulation.  Thus 
the  evil  will  always  correct  itself. 

III.  Was  it  necessary  that  the  notes  should  be  a 
legal  tender  for  the  principal  of  the  public  debt? 
By  the  principal  of  the  public  debt  we  understand, 
not  the  sums  owing  to  contractors,  public  officers, 
etc.,  for  supplies  or  services  rendered,  but  the  bonds 
and  Treasury  notes  issued  by  authority  of  Congress, 
in  definite  sums,  under  an  expressed  or  implied 
pledge  of  faith  that  they  should  be  paid  at  a  certain 


WERE   LEGAL   TENDER   NOTES   NECESSARY?       175 

time.  These  authorized  acknowledgments  of  in 
debtedness  may  be  divided  into  two  classes :  those 
already  issued  when  the  legal  tender  act  was  passed, 
and  those  to  be  issued  thereafter. 

To  begin  with  the  latter; — we  have  seen  that 
what  the  Government  really  gives  in  exchange  for 
the  clothing,  flour,  shot,  and  shell  needed  for  its 
armies  is  its  bonds ;  that  the  legal  tender  notes  are 
mere  tickets  entitling  the  holder  to  their  equivalent 
in  bonds,  so  that  the  transfers  of  notes,  goods,  and 
bonds  may  be  made  with  the  greatest  advantage  to 
all  parties ;  that  it  is,  therefore,  the  value  of  the 
bonds  themselves  we  are  to  look  after,  rather  than 
that  of  the  tickets,  or  other  money  with  which  they 
are  negotiated.  It  is  now  perfectly  obvious  that 
the  value  of  the  bonds  must  be  less,  how  much  less 
it  is  impossible  to  say,  in  consequence  of  being  pay 
able  in  notes.  It  is  obvious  than  any  person  would 
prefer  a  bond,  of  which  the  principal  wTas  payable 
in  coin,  to  one  payable  he  knew  not  how,  and  would 
therefore  be  willing  to  give  the  Government  more 
goods  and  more  labor  of  every  kind  for  it.  Hence 
the  measure  in  question  must,  in  the  long  run, 
necessitate  a  larger  public  debt  than  if  it  had  not 
been  adopted. 

In  the  case  of  the  bonds  already  issued,  the  meas 
ure  savors  so  strongly  of  a  breach  of  faith ;  it  so  cer 
tainly  involves  all  the  evil  consequences  of  a  breach 
of  faith,  that  it  can  be  justified  only  on  the  plea  of 
"  absolute  overwhelming  necessity."  Let  us  look  a 


176      WEKE   LEGAL   TENDER  NOTES  NECESSARY? 

little  at  the  necessity  of  the  case.  There  are  a  great 
many  things  to  be  done  in  the  world  which  seem 
very  difficult  when  we  look  at  them  with  our  hands 
in  our  pockets,  but  prove  quite  feasible  when  we 
earnestly  attempt  them.  When  legal  tender  notes 
were  authorized,  the  amount  of  the  debt  referred  to, 
maturing  in  the  course  of  the  next  three  years,  was 
as  follows : 

7T3<r  Treasury  Notes,      ....       $140,000,000 

Demand  Notes, 40,000,000 

Other  Treasury  Notes,*  say        .     .     30,000,000 


Total— about        $210,000,000 

Let  us  recall  a  few  items  from  previous  chapters. 
Far  the  large  portion  of  this  debt  was  contracted 
by  actually  paying  into  the  Treasury  gold  coin,  or 
its  absolute  equivalent,  at  a  time  when  nothing  else 
would  be  received  or  recognized  as  money  by  the 
Government,  and  when  no  one  supposed  that  any 
thing  else  would  be  so  received  or  recognized.  We 
have  also  seen  that  a  national  debt  is  due  from  the 
citizens  to  the  Government,  as  fully  as  from  the 
Government  to  the  public  creditor ;  that  if  every  one 

*  The  writer  has  no  data,  nor  is  he  aware  that  any  published  data 
exist,  for  an  exact  statement  of  the  amount  of  miscellaneous  Treasury 
notes  (mostly  interest-bearing  six  per  cents)  outstanding  at  the  time 
in  question.  But  the  actual  amount  cannot  vary  so  far  from  that 
given  as  to  affect  the  point  he  is  seeking  .to  establish,  the  feasibility 
of  redeeming  them  by  taxation. 


WEKE   LEGAL    TENDER   NOTES    NECESSARY?       177 

contributed  his  exact  share  of  the  debt  in  the  form 
of  a  tax,  there  would  be  no  debt  contracted ;  but  as 
so  heavy  a  tax  would  interfere  with  the  business 
of  many  citizens,  it  is  arranged  that  some  shall 
voluntarily  contribute  more  than  their  share,  on 
condition  of  afterwards  being  reimbursed  from  those 
who  have  paid  less.  A  debt  is  thus  contracted. 
Paying  the  debt  is  nothing  more  than  equalizing 
these  contributions,  so  that  every  one  shall  have 
contributed  his  just  share.  The  debt  in  question 
"would  have  been  paid  off  by  a  contribution  averag 
ing  about  three  dollars  and  a  half  per  annum  from 
each  inhabitant  of  the  loyal  States.  To  say  that 
the  Government  could  not  pay  off  this  debt  in  coin, 
is  to  say  that  it  could  neither  compel  nor  persuade 
its  citizens  to  fulfil  their  most  sacred  obligations; 
that  it  could  not  raise  a  tax  of  three  and  a  half  dol 
lars  per  annum  in  coin  from  each  inhabitant,  and 
had  not  credit  enough  to  borrow  coin  to  this  amount. 
A  Government  which  can  do  none  of  these  things, 
is  at  the  same  time  bankrupt  and  helplessly  imbecile  / 
for  if  it  were  not  bankrupt,  it  could  raise  the  coin 
by  loans,  and  if  it  were  not  helplessly  imbecile,  it 
it  could  raise  it  by  taxation. 

The  plea  of  necessity  is  therefore  at  the  same 
time  a  plea  of  bankruptcy,  and  a  plea  of  helpless 
imbecility  !  No  man  who  will  hereafter  raise  it, 
is  worthy  to  be  a  citizen  of  the  Republic.  And  yet 
it  has  been  urged  by  men  not  only  professing  to  be 
patriotic  citizens,  but  friends  of  our  public  credit. 


ITS      WERE   LEGAL   TENDER   NOTES   NECESSARY? 

IY.  Was  it  necessary  or  expedient  that  the  notes 
should  l>e  a  legal  tender  inpayment  of  private  debts  f 

In  a  previous  chapter  we  have  described  the 
great  revolution  in  the  views,  feelings,  honesty,  and 
habits  of  the  nation,  and  in  the  ownership  of  that 
property  which  is  the  result  of  laborious  frugality, 
slowly  and  almost  insensibly,  but  most  certainly  be 
ing  produced  by  the  operation  of  the  legal  tender 
act.  This  revolution,  and  the  evils  involved  in  it, 
were  not  unforeseen  by  the  able  men  who  framed 
the  act.  The  statesmanlike  speeches  of  Messrs.  Fes- 
senden,  Collamer,  and  Cowan  in  the  Senate  against 
the  legal  tender  clause  demonstrate  this,  but  the 
clause  was  nevertheless  retained  under  the  pressure 
of  a  supposed  necessity. 

The  entire  argument  for  this  necessity  is  found 
in  an  extract  from  a  paper  of  the  Honorable  Secre 
tary  of  the  Treasury  read  in  the  Senate  during  the 
debate.  The  respectable  and  responsible  source 
from  which  this  paper  emanated,  the  weight  which 
it  carried  in  the  legislative  debates,  and  the  enor 
mous  extent  to  which  the  legislation  it  gave  rise  to 
affected  the  ownership  of  property,  alike  demand  for 
it  the  most  serious  and  conscientious  attention.  The 
reasons  referred  to  were  quoted  as  follows  : 

"The  making  them  a  legal  tender,  however, 
might  still  be  avoided  if  the  willingness  manifested 
by  the  people  generally,  by  railroad  companies,  and 
by  many  or  all  banking  institutions,  to  receive  and 
pay  them  as  money  in  all  transactions,  were  abso- 


WEKE   LEGAL    TENDER    NOTES    NECESSARY  ?       179 

lutely  or  practically  universal ;  but,  unfortunately, 
there  are  many  persons  and  some  institutions  which 
refuse  to  receive  and  pay  them,  and  whose  action 
tends  not  merely  to  the  unnecessary  depreciation  of 
these  notes,  but  to  establish  discriminations  in  busi 
ness  against  those  who  in  this  matter  give  their  cor 
dial  support  to  the  Government,  and  in  favor  of 
those  who  do  not  make  such  discrimination.  This, 
if  possible,  should  be  prevented ;  and  a  provision 
making  notes  a  legal  tender  in  a  great  measure  pre 
vents  it  by  putting  all  citizens,  in  this  respect,  on 
the  same  level  both  of  rights  and  duties." 

This  argument  has  a  two-fold,  it  might  be  said 
an  ambiguous  application ;  and,  in  order  to  give  it 
the  accurate  analysis  proposed,  it  will  have  to  be 
considered  under  two  entirely  distinct  heads.  When 
the  Honorable  Secretary  says  that  many  persons  and 
institutions  refuse  to  receive  and  pay  the  notes  as 
money,  he  may  mean  either — 1.  That  there  are  many 
creditors  who  would  refuse  to  receive  them  for  debts 
contracted  before  the  passage  of  the  act,  and  there 
fore  with  the  understanding  that  they  could  legally 
demand  coin  in  payment ;  or  2.  That  many  would 
refuse  to  receive  them  as  cash  in  payment  of  services 
rendered  or  goods  sold  on  the  spot ;  for  example, 
that  a  drygoods  merchant  might  refuse  to  receive 
them  in  exchange  for  goods,  or  a  railroad  company 
refuse  to  receive  them  in  exchange  for  tickets.  As 
the  legal  tender  clause  covered  both  these  cases,  we 
shall  consider  separately  the  two  applications  of  the 
argument. 


180      WERE   LEGAL   TENDER   NOTES   NECESSARY? 

To  begin  with  the  first :  the  argument  simply 
advocates  all  the  evils  which  we  have  shown  to  flow 
from  the  legal  tender  clause.  When  this  clause  was 
under  discussion  all  debts  had  been  contracted  by 
the  creditor's  delivering  to  the  debtor  moneys,  goods, 
or  valuable  privileges,  equivalent  in  value  to  a  cer 
tain  amount  of  gold  coin ;  and  the  evidence  of  in 
debtedness  given  to  the  creditor  was  at  the  same 
time  an  acknowledgment  from  the  debtor  that  the 
other  was  justly  and  rightfully  entitled  to  this 
amount  of  gold  coin,  and  a  promise  that  he  would 
deliver  him  either  this  amount  of  coin,  or  something 
else  which  he  would  be  willing  to  accept  as  its 
equivalent.  This  amount  of  coin  was  as  truly  and 
rightfully  the  property  of  the  creditor  as  if  he  had 
it  in  his  own  drawer  ;  he  is  taxed  for  it  as  he  would 
be  in  the  latter  case,  and,  if  he  owed  a  third  person, 
that  person  could  seize  it  equally  whether  it  is  in 
the  form  of  a  debt  or  in  the  actual  possession  of  the 
first  creditor.  The  argument  of  the  Honorable  Sec 
retary,  so  far  as  it  applies  to  the  case  under  consid 
eration,  might  be  more  fully  and  exactly  expressed 
as  follows: 

Unfortunately  there  are  many  persons  and  some 
institutions  who  own  coin  which  is  in  the  possession 
of  others,  and  who  will  refuse  to  accept  these  notes 
in  lieu  of  the  coin,  and  whose  action  thus  tends  to 
the  unnecessary  depreciation  of  the  notes,  &c. 

So  the  legal  tender  clause  was  inserted,  which 
compelled  all  these  individuals  to  receive  the  notes 


WERE   LEGAL    TENDER   NOTES   NECESSARY?       181 

in  lieu  of  the  coin,  thus  most  unjustly  depriving 
them  of  their  just  rights.  Now  the  question  arises, 
does  this  power  of  consummating  injustice  add  any 
thing  to  the  value  of  the  notes  ?  Not  a  particle  ! 
A  little  close  thought  (to  say  nothing  of  centuries 
of  experience)  will  make  this  quite  plain  from 
whatever  standpoint  we  view  the  question  : 

1.  The  absence  of  the  legal  tender  clause  would 
not,  as  we  shall  presently  show,  have  diminished 
the  circulation  of  the  notes  in  the  least.     Nine  debts 
out  of  every  ten,  and  more  likely  ninety-nine  out  of 
every  hundred,  would  still  have  been  cancelled  by  a 
transfer  of  notes.     The  only  difference  would  have 
been  that,  instead  of  paying  notes  to  the  nominal 
amount  of  the  debt,  they  would  have  been  paid  to 
its  real  amount,  that  is,  to  such  amount  as  the  cred 
itor  was  willing  to  receive  and  the  debtor  to  give  as 
the  equivalent  of  coin.     The  debtor  would  thus  be 
saved  the  trouble  of  buying  the  coin,  and  the  cred 
itor  that  of  selling  it. 

2.  It  is  perfectly  obvious  that  the  creditor  would 
not  set  a  higher  value  on  the  notes  in  consequence 
of  having  been  compelled  to  receive  them  in  lieu  of 
coin,  any  more  than  he  would  set  a  higher  value 
on  the  ashes  left  after  the  conflagration  of  his  house 
than  on  any  other  ashes. 

3.  Although,  from  the  position  in  which   the 
debtor  is  placed,  the  notes  are  more  valuable  to  him 
for  being  legal  tender,  this  adds  nothing  to  their 
market  value.     This  will  be  made  clear  by  an  exam- 


182      WERE   LEGAL   TENDER   NOTES   NECESSARY? 

pie.  A  debtor  owes  $100.  Gold  is  at  100  per  cent, 
premium.  If  the  notes  are  a  legal  tender,  $100  of 
them  will  pay  the  debt ;  if  not,  he  will  be  obliged 
to  supply  himself  with  $200  of  them.  The  greater 
number  of  them  thus  required  will  rather  tend  to  in 
crease  their  value.  To  take  a  parallel  example,  sup 
pose  an  inventor  should  contrive  to  rig  a  ship  with 
half  as  much  cordage  as  is  now  used.  The  ship 
owner  would  then  find  half  a  mile  of  rope  to  answer 
him  as  good  an  end  as  one  mile  would  before,  ex 
actly  as  the  debtor  finds  $100  in  notes  to  answer  him 
in  place  of  $200  without  the  legal  tender  clause. 
But  the  manufacturer  of  the  rope  would  not,  on  this 
account,  be  enabled  to  get  a  higher  price  for  a  mile 
of  it. 

4.  The  value  of  any  article  depends  on  the  esti 
mate  set  upon  it  by  the  community.  Is  there  any 
single  individual  who  will  set  a  higher  estimate  on 
the  notes  because  they  possess  this  power  of  indefi 
nite  swindling  ? 

The  fact  is,  that  the  ideas  which  underlie  the 
argument  of  the  Honorable  Secretary  are  precisely 
those  which  in  the  last  century  used  to  enact 
penal  laws,  or  fulminate  denunciatory  proclama 
tions  against  all  who  would  not  accept  pieces 
of  paper  as  the  equivalent  of  gold.  These  laws 
enacted  that  persons  who  had  goods  for  sale 
should  sell  them  at  the  same  rates  for  paper  that 
they  would  have  sold  them  for  coin.  The  legal 
tender  act  does  not  go  as  far  as  this ;  it  only 


WERE   LEGAL   TENDER   NOTES   NECESSARY  ?       183 

enacts  that  those  who  had  previously  sold  goods 
with  the  expectation  of  receiving  coin,  should  be 
compelled  to  accept  paper  as  the  equivalent.  But 
the  argument  would  have  applied  with  as  much 
force  to  subsequent  sales  of  goods.  We  might 
argue,  for  example : 

"  There  are  many  persons  and  some  institutions 
having  goods  for  sale  which  refuse  to  receive  and  pay 
out  these  notes  as  the  equivalent  of  coin,  but  charge 
twice  as  much  for  goods  when  paid  in  notes  as 
when  paid  in  coin ;  and  whose  action  thus  tends  not 
only  to  the  unnecessary  depreciation  of  these  notes, 
but  to  establish  discriminations  in  business  against 
those  who  charge  no  more  for  their  goods  than  if 
they  had  been  paid  in  coin." 

Would  not  this  argument  be  as  sound  and  con 
clusive  in  favor  of  setting  a  universal  tariff  of  prices 
as  that  actually  used  was  in  favor  of  the  legal  ten 
der  clause  ? 

It  will  be  remembered  that  all  this  criticism  ap 
plies  only  to  that  interpretation  of  the  argument 
cited,  which  presumes  it  to  refer  to  debts  already 
contracted.  We  still  have  the  second  application 
of  the  argument  to  consider,  viz. :  that  if  the  notes 
were  not  a  legal  tender,  "  many  persons  and  some 
institutions  would  refuse  to  receive  and  pay  them 
as  money  "  in  current  transactions,  as  in  exchange 
for  goods  sold,  or  services  rendered  on  the  spot.  It 
is  fairly  supposable  that  the  Honorable  Secretary  had 
in  his  mind's  eye  a  railroad  company  who  would 


184      WEEE   LEGAL   TENDEE   NOTES   NECESSARY? 

not  receive  the  notes  in  exchange  for  tickets;  a  trader 
who  would  not  receive  them  in  exchange  for  goods, 
or  a  bank  which  would  not  receive  and  pay  them 
as  "  bankable  funds."  At  least,  we  may  fairly  take 
these  as  representative  of  the  persons  and  institu 
tions  which  would  have  refused  to  pay  and  receive 
them ;  so  that  if  it  can  be  made  perfectly  plain  that 
no  one  of  the  above  three  parties  would  have  seri 
ously  diminished  the  value  of  the  notes  by  their 
action,  then  it  may  be  considered  as  established 
that  no  other  persons  or  institutions  would  have 
done  so.  But  we  must  first  look  at  one  or  two  pre 
liminary  facts : 

In  the  first  place,  the  general  acceptance  of  the 
notes  as  the  medium  of  exchange  of  the  country 
was  inevitable.  Paid  by  the  Government  to  the 
army,  the  navy,  and  the  public  contractors,  they 
would,  through  these  media,  have  permeated  every 
channel  of  business.  National  pride  would  have 
promoted  this  general  acceptance. 

Again,  when  the  notes  began  to  depreciate, 
they  would  have  driven  the  bank  money  out  of  cir 
culation,  in  consequence  of  the  general  fact  that 
the  less  valuable  money,  if  accepted  by  the  majori 
ty  of  the  community  at  all,  always  displaces  that 
which  is  more  valuable.  In  other  words,  the  bank 
notes  being  redeemable  in  coin  whenever  the  State 
authorities  choose  to  force  the  banks  to  do  so, 
would  have  been  hoarded  as  gold  was,  while  the 
government  notes,  not  being  thus  redeemable, 
would  have  been  kept  for  use  as  money. 


WERE   LEGAL    TENDER   NOTES   NECESSARY?       185 

The  notes  having  thus  become  the  "  money " 
which  every  man  would  carry  in  his  pocket  to  meet 
his  current  expenses,  suppose  that  a  trader  should 
refuse  to  take  any  thing  but  gold  in  exchange  for 
his  goods.  At  the  worst  he  would  only  put  hia 
customers  to  the  trouble  of  buying  the  gold  some 
where  else;  but  more  likely  the  customers  would 
prefer  to  buy  their  goods  where  the  money  they 
already  had  in  their  possession  would  be  received 
in  exchange.  Thus  the  trader  would  injure  no  one 
but  himself  by  his  actions. 

The  same  remarks  will  apply  to  railroad  com 
panies.  If  they  were  determined  to  have  their 
fares  paid  in  gold,  they  had  only  to  add  the  pre 
mium  on  gold  to  the  currency  price  of  their  tickets, 
and  then  buy  gold  with  the  proceeds.  This  they 
can  do  just  as  well  under  the  operation  of  the  legal 
tender  clause  as  if  that  clause  did  not  exist.  Fi 
nally,  no  bank  could  reasonably  refuse  to  receive 
the  notes  from  depositors,  to  be  paid  back  in  kind, 
nor  refuse  to  loan  them  to  customers  on  the  same 
terms ;  the  blow  aimed  at  the  value  of  the  notes  by 
such  refusals  would  simply  have  recoiled  on  their 
own  heads,  by  driving  their  customers  to  other  in 
stitutions. 

Thus  reason  agrees  with  experience  in  showing 
that  it  adds  nothing  to  the  value  of  a  paper  circula 
tion  to  declare  it  a  legal  tender.  Mr.  Chase's  argu 
ment  is  like  a  cloud  on  a  mountain-top,  which  looks 
Bolid  and  impenetrable  when  viewed  from  a  dis- 


186      WERE   LEGAL    TENDER   NOTE6   NECESSARY? 

tance,  but  offers  no  more  resistance  than  the  air 
when  we  come  to  grapple  with  it.  Every  idea  in 
it  is  a  century  behind  the  age.  It  belongs  to  the 
period  when  men  thought  that  money  was  the  great 
element  of  wealth  and  power ;  that  it  derived  its^ 
value  from  the  authority  of  the  Government,  and 
that  all  who  would  not  set  the  government  value 
upon  it  were  offenders.  Since  men  have  cured 
themselves  of  the  illusions  of  habit,  and  acquired 
natural  and  correct  ideas  of  the  functions  of  money ; 
since  they  have  learned  that  the  interests  of  differ 
ent  classes  of  society  are  not  antagonistic,  but  har 
monious,  and  that  the  good  of  the  State  is  the  com 
bined  good  of  the  citizens,  they  have  seen  that 
every  one,  whatever  his  religious  or  political  opin 
ions,  will  accept  any  kind  of  money  at  the  same  val 
uation  and  on  the  same  terms  that  his  neighbor  will 
accept  it  from  him,  that  no  man  ever  accepts  it  on 
any  other  terms,  and  that  forcing  him  to  do  so  is 
simply  robbery ;  in  a  word,  that  if  a  legal  tender 
clause  does  not  force  paper  money  on  an  unwilling 
creditor  it  is  useless,  and  if  it  does  it  legalizes  rob 
bery. 

Pa^er  money  has  been  the  curse  of  our  country 
for  nearly  two  centuries.  Before  the  Revolution 
nearly  every  state  had  its  "  bills  of  credit "  in  circu 
lation,  the  value  of  which  was  continually  fluctuat 
ing.  Sometimes  they  were  founded  on  correct 
financial  principles,  as  when,  contemporaneously 
with  their  issue,  a  tax  was  levied  sufficient  to  absorb 


WERE   LEGAL   TENDER   NOTES   NECESSARY?       187 

tliem.  Serious  depreciation  was  then  impossible ; 
but  commonly  no  means  were  provided  for  giving 
them  any  fixed  value  whatever,  but  they  were  left 
entirely  to  the  mercy  of  chance.  This  long  fit  of 
paper  money  drunkenness  came  to  an  end  with  the 
Confederation.  The  cup  was  drained  to  the  dregs. 

When  the  fathers  of  our  republic  met  to  frame 
that  Constitution  which  was  to  secure  the  blessings 
of  liberty  to  their  posterity,  they  had  this  century 
of  paper  money  experience  to  look  back  upon. 
They  saw  innumerable  evils,  without  any  good  to 
counterbalance  them.  Every  argument  for  the  al 
luring  cause  of  the  evil  had  been  refuted  by  the 
bitter  test  of  experience.  They  thought,  and 
thought  justly,  that  one  of  the  greatest  blessings 
they  could  bestow  upon  their  posterity  would  be 
to  protect  them  against  this  fruitful  source  of 
evil.  Accordingly,  it  was  enacted  that  "  no  State 
should  issue  bills  of  credit  or  make  any  thing  but 
gold  and  silver  coin  a  tender  in  payment  of  debts." 
To  show  the  views  of  these  prohibitions  entertained 
by  the  next  generation  of  statesmen  and  jurists,  WQ 
quote  the  opinions  of  Story  *  and  the  writers  of  the 
Federalist : 

"  The  history,  indeed,  of  the  Various  laws  which 
were  passed  by  the  States  in  their  colonial  and  inde 
pendent  character  upon  this  subject,  is  startling  at 
once  to  our  morals,  to  our  patriotism,  and  to  our 

*  Commentaries  on  the  Constitution  of  the  United  States.  Chap, 
xxxiii. 


188      WERE   LEGAL   TENDER   NOTES   NECESSARY  ? 

sense  of  justice.  Not  only  was  paper  money  issued, 
and  declared  to  be  a  tender  in  payment  of  debts, 
but  laws  of  another  character,  well  known  under 
the  appellation  of  tender  laws,  appraisement  laws, 
instalment  laws,  and  suspension  laws,  were  from 
time  to  time  enacted,  which  prostrated  all  private 
credit  and  all  private  morals.  By  some  of  these 
laws  property  of  any  sort,  however  worthless, 
either  real  or  personal,  might  be  tendered  by  the 
debtor  in  payment  of  his  debts.  Such  grievances 
and  oppressions,  and  others  of  a  like  nature,  were 
the  ordinary  results  of  legislation  during  the  revo 
lutionary  war,  and  the  intermediate  period  down 
to  the  formation  of  the  Constitution.  They  entailed 
the  most  enormous  evils  on  the  country,  and  intro 
duced  a  system  of  fraud,  chicanery,  and  profligacy, 
which  destroyed  all  private  confidence  and  all  in 
dustry  and  enterprise."  «. 
"  The  prohibition  to  emit  bills  of  credit  cannot, 
perhaps,  be  more  forcibly  vindicated  than  by  quoting 
the  glowing  language  of  the  Federalist,  a  language 
justified  by  that  of  almost  every  contemporary 
writer,  and  attested  in  its  truth  by  facts  from  which 
the  mind  involuntarily  turns  away  at  once  with  dis 
gust  and  indignation.  This  prohibition,  says  the 
Federalist,  must  give  pleasure  to  every  citizen  in 
proportion  to  his  love  of  justice  and  his  knowledge 
of  the  true  springs  of  public  prosperity.  The  loss 
which  America  has  sustained  since  the  peace  from 
the  pestilent  effects  of  paper  money  on  the  neces- 


WERE    LEGAL    TENDER   NOTES    NECESSARY?       189 

sary  confidence  between  man  and  man,  on  the  neces 
sary  confidence  in  the  public  councils,  on  the  in 
dustry  and  morals  of  the  people,  and  on  the  char 
acter  of  republican  government,  constitutes  an 
enormous  debt  against  the  States  chargeable  with 
this  unadvised  measure  which  must  long  remain 
unsatisfied ;  or  rather,  an  accumulation  of  guilt 
which  can  be  expiated  no  otherwise  than  by  a 
voluntary  sacrifice  on  the  altar  of  justice  of  the 
power  which  has  been  the  instrument  of  it." 

"  It  was  the  object  of  the  prohibition  to  cut  up 
the  whole  mischief  by  the  roots,  because  it  had 
been  deeply  felt  throughout  all  the  States,  and  had 
deeply  affected  the  prosperity  of  all." 

Such  are  the  enlightened  opinions  of  our  wisest 
statesmen  and  jurists,  and  such  the  sad  array  of  folly 
and  wickedness  on  which  those  opinions  were  found 
ed.  And  yet,  here  we  are  restating  the  .sophisms, 
and  reacting  the  history  of  a  past  century !  The 
most  powerful  republic  on  the  globe,  with  unlimit 
ed  resources,  adopting  the  last  and  most  reckless  ex 
pedient  of  a  bankrupt  Government,  and  men  pro 
fessing  to  be  its  friends  declaring  that  this  is  its 
only  resource  !  By  what  process  have  we  brought 
ourselves  into  such  a  position  ?  Our  whole  policy 
can  be  traced  to  two  very  simple  logical  fallacies : 

The  first  fallacy  was  that  the  main  expenses  of 
the  war  must  ~be  obtained  by  loans  in  some  form. 
We  looked  in  the  wrong  direction  for  our  money 
in  the  beginning,  and  we  have  most  steadily  and 


190      WEBE   LEGAL   TENDEB   NOTES   NECESSARY? 

persistently  looked  in  that  direction  ever  since. 
When  the  President  called  on  Congress  for  §300,- 
(K)0,000,  instead  of  trying  to  devise  some  means 
of  raising  this  sum  by  a  direct  tax,  or  at  least 
inquiring  whether  a  loan  or  a  tax  would  be 
the  better,  it  was  universally  taken  for  "granted 
that  loans  were  the  only  resource.  As  additional 
sums  were  wanted,  we  had  recourse  to  more  loans. 

When  the  Secretary  of  the  Treasury  called  for 

million  dollars,  the  idea  of  levying  a  direct  tax  of 

million  dollars  was  never  discussed,  never 

broached,  so  far  as  we  have  any  evidence  never 
thought  of.  Finance  committees  simply  racked 
their  brains  for  devices  to  sell million  bonds. 

This  course  was  productive  of  its  legitimate  and 
inevitable  effect.  Loans  could  be  obtained  on  favor 
able  terms  only  from  that  small  class  who  were  at 
the  same  time  frugal,  ^possessed  of  money,  and  pos 
sessed  of  confidence  in  the  good  faith  and  stability 
of  the  Government.  As  soon  as  this  class  was  ex 
hausted,  the  inevitable  depreciation  commenced. 
Government  promises  brought  less  and  less  in  the 
market. 

With  the  suspension  of  specie  payments,  gold 
"  disappeared "  from  circulation.  Alarmed  at  the 
increasing  difficulty  of  negotiating  bonds,  the  Sec 
retary  of  the  Treasury  made  an  estimate  of  their 
future  depreciation,  on  the  supposition  that  they 
were  negotiated  for  coin.  He  concluded  that 
before  $200,000,000  in  coin  could  be  obtained  in 


WERE   LEGAL   TENDER   NOTES   NECESSARY?         191 

this  way,  the  bonds  would  fall  to  50  cents  on  the 
dollar. 

Here  was  an  excellent  opportunity  for  a  change 
of  policy.  When  government  promises  to  pay 
would  only  bring  fifty  cents  on  the  dollar,  and 
when  there  was  every  prospect  of  an  expenditure 
of  eight  or  nine  hundred  millions  a  year,  it  was 
high  time  to  inquire  whether  arms,  ammunition, 
and  clothing  could  not  be  obtained  by  some  other 
means  than  giving  promises  to  pay  in  exchange 
for  them.  Unfortunately,  however,  instead  of  doing 
this,  it  was  thought  that  that  credit  which  could 
not  be  obtained  directly,  might  be  obtained  indi 
rectly  by  some  ingenious  device  of  statesmanship, 
or  some  scheme  of  financial  legerdemain.  This 
was  the  second  great  mistake.  The  issue  of  legal 
tender  notes,  and  of  certificates  of  indebtedness, 
the  issue  of  bonds  and  Treasury  notes  in  a  multitude 
of  forms,  the  various  devices  to  create  a  demand  for 
government  indebtedness,  including  that  concentra 
tion  of  absurdities  the  National  banking  law,  the  gold 
laws,  the  prepayment  of  interest  on  the  public  debt, 
all  these  are  mere  temporary  makeshifts  in  a  grand 
attempt  to  achieve  an  impossibility.  Had  none 
of  them  ever  been  thought  of,  but  had  we  kept  on  in 
the  old-fashioned  way  of  selling  bonds  exclusively  for 
coin,  our  finances  would  have  been  in  a  far  more  fa 
vorable  condition  than  they  are.  But  we  would  still 
have  been  obliged  to  submit  to  large  sacrifices, 
probably  half  as  large  as  we  actually  have  submit- 


192       WEKE   LEGAL   TENDER   NOTES    NECESSARY?. 

ted  to.  The  combined  skill  of  all  the  financiers  of 
the  age  could  no  more  borrow  $700,000,000  a  year 
on  favorable  terms,  with  a  tax  of  less  than  $200,- 
000,000,  than  the  combined  skill  of  Alexander, 
Hannibal,  and  Napoleon  could  avail  to  win  vic 
tories  with  an  army  which  was  to  remain  im 
movable. 

The  nature  of  this  second  mistake  will  appear 
more  clearly,  if  we  compare  our  policy  with  the 
reasons  urged  in  favor  of  it.  These  reasons  are 
found  in  the  Report  of  the  Honorable  Secretary  of 
the  Treasury  for  December,  1862. 

Mr.  Chase  here  speaks  of  the  suspension  of  pay 
ment  of  the  demand  notes  as  a  "  necessity."  He 
says  that  it  was  "  impossible  for  the  Government 
to  negotiate  loans  of  coin  except  at  ruinous  loss," 
and  that  "a  condition  had  been  created  by  the 
suspension  which  rendered  loans  of  coin  impossi 
ble." 

I  have  maintained  that  these  statements  are  ill- 
founded  ;  but  let  us  admit  that  they  were  true  in 
every  particular.  Why  was  it  impossible  to  nego 
tiate  loans  of  coin  ?  What  was  "  the  condition  of 
things  "  which  caused  this  impossibility  ?  But  one 
answer  is  possible :  The  people  would  not  trust  the 
Government  on  any  reasonable  terms  with  the  coin 
lying  idle  on  their  hands.  Grant  Mr.  Chase's 
premises,  and  there  is  no  possible  escape  from  this 
conclusion. 

"With  such  a  statement  of  our  public  credit  at 


WERE   LEG4L   TENDER   NOTES   NECESSARY?       193 

home,  published  to  the  country  and  the  world  in  an 
official  document,  what  gold  value  could  we  expect 
our  bonds  to  bear  ?  And  yet  Mr.  Chase  goes  on  to 
attribute  a  premium  of  37  per  cent,  on  gold,  as 
compared  with  legal  tender  notes  to  "  the  ignorant 
fears  of  foreign  investors  in  National  and  State 
bonds  and  other  American  securities,  and  the 
timid  alarms  of  numerous  nervous  individuals  in 
our  own  country."  The  premium  is  here  attrib 
uted  to  its  true  immediate  cause.  But  what  caused 
these  " ignorant  fears  and  timid  alarms"?  Were 
they  not  to  be  expected  when  a  complete  financial 
system  had  been  adopted,  the  fundamental  idea  of 
which,  openly  and  officially  vowed  before  the  world, 
was  that  American  citizens  would  not  trust  their 
Government  with  the  universal  money  of  nations 
on  any  terms  but  such  as  would  involve  the  Gov 
ernment  in  speedy  financial  ruin  ? 

That  we  should  have  initiated  a  policy  founded 
on  two  such  mistakes  as  those  pointed  out,  is  per 
haps  excusable  under  the  circumstances.  We  sud 
denly  found  ourselfes  in  a  new  and  untried  and 
most  embarrassing  position.  There  was  not  a  man 
in  the  country  who  was  qualified  by  experience  to 
give  us  any  advice,  for  the  simple  reason  that  there 
was  not  a  man  who  had  seen  a  nation  suddenly  at 
tempt  to  raise  money  at  the  rate  of  $800,000,000  a 
year.  The  general  principles  of  national  finance 
were  our  only  guide.  These  were  almost  wholly 
unstudied  and  unknown.  It  was,  therefore,  very 
9 


194:      WEEE  LEGAL   TENDER  NOTES   NECESSARY? 

natural  that  we  should  adopt,  in  the  first  place,  the 
policy  which  nations  in  general  have  adopted  of 
late  years  when  called  on  for  a  sudden  and  tempo 
rary  increase  of  national  expenditures. 

It  was  also  natural,  though  less  excusable,  that 
when  we  found  this  path  beset  with  difficulties,  we 
should  try  whether  they  could  not  be  removed,  not 
reflecting  that  they  necessarily  inhered  in  the  path 
marked  out,  and  that  every  attempt  to  remove  them 
was  simply  a  waste  of  most  valuable  labor.  In  a 
word,  that  we  should  have  adhered  to  a  wrong 
policy  was  excusable  when  we  had  only  the  voice 
of  reason  (which  was  drowned  in  the  din  of  war) 
and  the  teachings  of  history  (which  were  forgotten 
in  the  turmoil)  to  warn  us  of  our  error. 

But  that  we  should  have  adhered  to  our  error 
after  it  was  made  patent  by  our  own  experience,  as 
well  as  by  reason  and  the  experience  of  others,  is 
inexcusable.  When  gold  attained  a  premium  of  one- 
third,  the  fallacy  that  the  value  of  our  bonds  could 
be  increased  by  an  issue  of  notes,  was  perfectly 
plain.  How  was  this  premi^a  on  gold  viewed 
by  the  financial  authorities  ?  Mr.  Chase  says  : 

"  It  is  true  that  gold  commands  a  premium  in 
notes  ;  in  other  words,  that  to  purchase  a  given 
amount  of  gold  a  greater  amount  in  notes  is  requir 
ed.  But  it  is  also  true  that  on  the  suspension  of 
specie  payments,  and  the  substitution  for  coin  of 
United  States  notes  convertible  into  six  per  cent, 
specie  bonds  as  the  legal  standard  of  value,  gold 


WEKE   LEGAL  TENDER   NOTES   NECESSARY  \      195 

became  an  article  of  merchandise,  subject  to  the 
ordinary  fluctuations  of  supply  and  demand,  and 
to  the  extraordinary  fluctuations  of  mere  specula 
tion." 

Here  the  Honorable  Secretary  steers  so  close  to 
the  truth  that  it  is  wonderful  how  it  escaped  him. 
"  The  legal  tender  notes  are  convertible  into  six  per 
cent,  bonds  as  the  legal  standard  of  value"  Of 
course,  then,  the  notes  cannot  be  worth  anymore 
than  the  bonds,  after  enough  are  issued  to  supply 
the  want  of  a  circulating  medium.  Let,  us  then, 
discover  what  the  bonds  will  be  worth,  and  we  can 
judge  what  the  notes  will  be  worth.  The  bonds, 
says  Mr.  Chase,  will  soon  not  bring  sixty  cents  on 
the  dollar  in  coin ; — "  loans  of  coin  are  impossible 
except  at  ruinous  sacrifice."  Then  the  notes,  also, 
must  speedily  fall  to  eighty,  sixty,  or  even  fifty  per 
cent,  as  compared  with  gold,  if  his  doctrine  is  true. 
Or,  the  notes  being  the  standard,  gold  must  speed 
ily  bear  a  premium  of  thirty,  sixty,  and  one  hundred 
per  cent. 

Instead  of  accepting  this  inevitable  conclusion 
from  his  own  premises,  Mr.  Chase  argues  that  the 
premium  is  greater  than  ought  reasonably  to  have 
been  expected.  He  makes  the  same  transparent 
mistake  that  has  been  pointed  out  in  the  financial 
management  of  the  French  revolution,  namely,  that 
by  issuing  representatives  of  an  article  to  circulate 
as  money,  he  could  permanently  prevent  the  value 
both  of  the  representative  and  the  thing  represent- 


196      WERE   LEGAL   TENDER   NOTES   NECESSARY? 

ed  from  depreciating.  To  prove  that  there  had 
"been  no  actual  depreciation,  he  shows  that  there  has 
been  no  general  advance  in  the  price  of  the  most 
important  articles  of  consumption.  But  this  only 
proves  either  that  those  articles  were  unusually 
plenty,  or  that  the  equilibrium  of  prices  was  not  re 
stored. 

No  doubt  he  expressed  the  views  of  the  country 
at  large.  Instead  of  accepting  the  rise  in  the  price 
of  gold,  and  of  course  the  depreciation  in  currency 
and  bonds  as  unavoidable  facts,  and  endeavoring  to 
frame  some  new  policy,  we  began  to  carp  at  those 
facts,  and  attribute  them  to  every  cause  except  the 
true  one,  the  unchangeable  laws  of  value.  To  ex 
press  my  whole  idea  in  a  metaphor,  we  built  our 
house  on  the  sand,  in  defiance  of  the  observed  fact 
that  all  who  had  previously  been  guilty  of  this 
folly  had  their  houses  destroyed,  and  in  defiance  of 
the  plain  dictate  of  reason  that  a  house  so  situated 
must  be  exposed  to  destruction.  We  can  find  ex 
cuses  for 'this  act.  But  when  the  rain  fell  and  the 
wind  blew,  and  we  found  our  foundations  being 
washed  away,  instead  of  seeking  a  better  founda 
tion,  we  denounced  the  storm,  and  attributed  it  to 
the  machinations  of  our  enemies.  For  this,  enlight 
ened  posterity  will  never  pardon  us. 

We  have  seen  that  the  legal  tender  notes  have 
been  productive  of  a  vast  amount  of  evil  which 
does  not  yet  appear,  while  there  is  absolutely  noth 
ing  to  place  to  their  credit.  We  have  given  one 


WERE   LEGAL   TENDER   NOTES    NECESSARY?       197 

more  illustration  of  the  principle  that  high  moral 
qualities  aided  by  hard  labor  on  the  part  of  those 
who  stay  at  home,  as  well  as  hard  fighting  on  the 
part  of  those  who  take  the  field,  is  the  only  source 
of  military  power.  Every  argument  in  favor  of 
paper  money  is  a  fallacy  unworthy  the  nineteenth 
century. 

There  is  but  one  way  to  set  our  credit  on  a  firm 
basis,  and  we  owe  it  to  posterity  to  retrieve  our 
faults  by  adopting  this  plan.  It  is  to  adopt  a  consti 
tutional  amendment  to  this  effect : 

Nothing  shall  ~be  a  legal  tender  in  payment  of 
debts  exceeding  $10  except  gold  coin,  tendered  in  the 
amount  of  at  least  two  hundred  and  thirty-one  grains 
of  pure  gold  to  every  $10  of  indebtedness. 

Enact  thus,  and  the  pledges  of  public  and  pri 
vate  faith  will  no  longer  be  at  the  mercy  of  short 
sighted  politicians.  Every  man  who  loans  gold  to 
the  Government  will  then  be  sure  of  getting  his  gold 
in  return  if  the  Government  exists.  The  laborer  who 
deposits  in  a  savings  bank  will  not  find  his  earnings 
dwindle  away  when  they  ought  to  increase.  The 
annuitant  will  know  then  that  he  is  not  to  be  de 
frauded  out  of  a  provision  for  his  old  age  by  any 
technical  quibbles.  Every  one  who  holds  a  promise 
to  pay  money  at  a  future  period  will  know  that  the 
meaning  of  that  promise  is  not  staked  on  a  die, 
but  is  as  unchangeable  as  the  Constitution  itself. 

This  measure  wrill  not  prevent  the  circulation  of 
bank  money  or  United  States  notes,  whenever  it  is 


198      WERE   LEGAL   TENDER  NOTES   NECESSARY? 

deemed  advisable  to  issue  them.  It  will  simply 
protect  the  creditor  in  case  the  value  of  these  notes 
falls  below  that  of  gold,  by  compelling  the  debtor 
to  pay  the  real  value  of  his  debt,  without  reference 
to  the  value  of  notes. 

Until  this,  or  something    equivalent,  is   done, 
public  confidence  can  never  be  fully  restored. 


CHAPTER  YIII. 

TH.E  NATIONAL  BANKING  SYSTEM. 

THE  object  of  banks  is  to  put  into  a  different 
form  that  portion  of  the  wealth  of  a  community 
which  is  in  the  form  of  money.  The  circumstances 
under  which  a  change  of  form  is  desirable,  and  the 
cause  of  the  continual  tendency  to  change,  has  been 
hinted  at  in  treating  of  the  financial  elements  of 
military  strength.  All  that  portion  of  the  wealth 
of  a  community  which  is  in  the  form  of  "  Circulat 
ing  Capital,"  is  really  lying  idle.  Circulating  capi 
tal  may  be  defined  as  all  products  of  labor  which 
are  waiting  to  be  put  to  their  final  use,  or  to  reach 
their  final  destination.  Thus,  if  a  coat  is  one  year 
in  passing  from  the.  loom  to  the  wearer,  it  has  been 
in  the  form  of  circulating  capital  during  that  time, 
and  the  profits  of  the  dealers  through  whose  hands 
it  has  passed  must  include  one  year's  interest  on  the 
price  of  the  cloth.  All  coin  circulating  as  money 
belongs  to  this  class,  because  every  holder  is  wait 
ing  to  pass  it  off,  so  that  it  never  reaches  its  final 
destination  while  in  the  form  of  coin.  So  does  all 


200  THE   NATIONAL    BANKING    SYSTEM. 

the  "  stock  in  trade  "  of  every  merchant,  manufac 
turer,  or  business  man  of  any  kind,  because  every 
single  article  is  -waiting  for  a  purchaser.  It  is  very 
clear  that  the  profits  of  all  these  tradesmen  must  in 
clude  the  interest  on  their  stock  in  trade. 

If  a  method  could  be  invented  by  which  every 
article  made  should  pass  immediately  to  the  final 
purchaser  without  waiting  in  anybody's  hands,  all 
this  interest  could  be  saved  to  the  community,  and 
wealth  formerly  invested  in  stock  could  be  put  into 
some  other  shape.  This  might  be  efTected  in  two 
ways: 

1.  If  the  plan  were  such  that  it  could  be  put 
into  immediate  operation  by  each  individual  trades 
man  or  merchant,  he  could  export  his  entire  stock, 
and  buy  a  share  in  a  ship,  or  he  could  hire  labor  to 
build  a  foundry,  or  he  could  exchange  for  some 
article  of  luxury.     The  community  at  large  would 
then  reap  the  benefit,  the  tradesman  would  be  as 
rich  as  ever,  because  he  would  have  something  to 
show  in  exchange  for  his  stock,  and  the  community 
at  large  would  thereafter  be  enabled  to  buy  goods 
cheaper  by  the  amount  which  they  formerly  had  to 
pay  him  as  interest  on  his  stock  in  trade. 

2.  The  work  of  changing  the  form  of  the  capital 
might  be  left  entirely  to  corporations,  who  would 
gradually  buy  up  the  stock,  and  export  it,  constitute 
themselves  the  agent  for  the  tradesmen,  buy  from 
the  manufacturers  and  sell   to  the  public  at  old 
prices,  and  thus  gain  the  interest  on  the  entire  stock 


THE   NATIONAL   BANKING    SYSTEM.  201 

while  that  stock  was  still  in  an  entirely  different 
form.  The  corporations  alone  would  be  benefited ; 
but  since  no  one  would  be  injured,  and  since  every 
one  would  be  free  to  become  a  member  of  the  cor 
poration,  this  would  give  no  ground  of  complaint. 

This  change  of  form  is,  however,  almost  entirely 
impracticable  in  the  vast  majority  of  cases,  owing 
to  the  immense  diversity  in  the  quality  of  goods, 
and  the  total  uncertainty  respecting  the  demand  for 
goods  of  any  one  quality.  But,  in  the  case  of  mon 
ey,  we  have  some  $300,000,000  worth  of  circulating 
capital,  all  of  precisely  one  kind  and  quality,  and 
the  demand  for  which  is  almost  constant.  It  is 
lying  idle,  and  yielding  interest  to  no  one.  "What 
ever  portion  of  this  coin  may  be  held  by  a  neighboi 
of  a  bank,  he  can  advantageously  deposit  there  until 
he  wants  to  pass  it  off.  Then  he  can  give  his  cred 
itor  an  order  or  "  check  "  on  the  bank  for  the  coin. 
Perhaps  this  creditor  also  will  leave  the  coin  on  de 
posit.  Thus  the  bank  will  soon  find  almost  all  the 
money  of  the  community  lying  idle  in  its  vaults, 
although  the  ownership  of  it  is  continually  chang 
ing.  Thus  we  have  a  bank  of  deposit. 

The  bank  finding  all  this  coin  constantly  on 
hand  can  loan  it  out  at  the  current  rate  of  interest. 
Thus  we  have  a  bank  of  discount.  The  borrowers 
will  probably  still  leave  the  coin  on  deposit,  and  as 
the  applications  for  discount  will  be  greatly  in  ex 
cess  of  the  deposits,  the  bank  may  loan  out  many 
times  as  much  coin  as  it  has  in  its  vaults. 


202  THE   NATIONAL   BANKING   SYSTEM. 

If  the  borrower  or  depositor  wants  to  pay  some 
one  to  whom  a  check  will  not  be  convenient  or  ac 
ceptable,  the  bank  may  give  him  in  lieu  of  the  coin 
a  bill  entitling  the  bearer  to  the  coin  whenever  he 
demands  it,  which  may  be  more  convenient  to  him 
than  the  coin  itself.  Thus  we  have  a  bank  of  cir 
culation. 

So  long  as  all  the  business  of  the  country  goes 
on  as  usual,  the  bank  will  be  perfectly  safe,  though 
its  specie  reserve  amount  to  but  a  small  fraction  of 
the  debts  payable  on  demand.  But  a  panic  comes, 
and  every  one  rushes  to  the  bank  to  put  his  debt 
into  the  form  of  coin.  Then  the  weakness  of  the 
entire  system  becomes  apparent.  The  bank  owes 
debts  many  times  exceeding  not  only  the  coin  which 
lies  in  its  vaults,  but  perhaps  more  than  is  possessed 
by  the  entire  community.  True,  the  bank  holds 
notes  from  individuals  exceeding  its  liabilities,  but 
the  latter  are  due  now,  while  the  former  may  not  be 
due  for  weeks ;  and  the  debtors  may  be  unable  to 
pay  them  owing  to  the  disarrangement  of  their  busi 
ness  caused  by  the  panic. 

Against  the  disastrous  effects  of  such  a  panic  it 
is  impossible  to  guard  by  any  plan  yet  tried.  If, 
indeed,  the  bank  -were  required  to  keep  coin  enough 
continually  on  hand  to  meet  all  its  liabilities,  the 
danger  would  be  entirely  avoided ;  but  this  would 
defeat  the  very  object  of  the  bank.  The  eoin  might 
be  idle  in  its  vaults  for  a  century.  But,  suppose  the 
coin  is  loaned  to  the  Government,  to  be  repaid  when 


THE   NATIONAL   BANKING    SYSTEM.  203 

the  bank  is  in  need  of  it  ?  Alas  !  the  critical  moment 
when  the  bank  will  want  it,  will  be  just  the  mo 
ment  when  the  Government  cannot  pay  it,  and 
when  the  government  bonds  cannot  be  sold  except 
at  enormous  sacrifice. 

A  suspension  under  the  circumstances  seems  like 
a  necessity  ;  and  yet  it  is  a  moral  wrong,  for  which 
we  shall  certainly  suffer.  The  disastrous  effects  of 
paper  money  which  we  are  now  beginning  to  suffer, 
and  are  likely  to  suffer  for  a  generation  to  come,  are 
the  consequences  of  the  lax  ideas  of  public  probity 
which  have  been  the  result  of  bank  suspensions. 

The  relative  merits  of  the  National  and  the  State 
banks  in  their  way  of  effecting  these  primary  objects 
of  banking,  I  shall  not  now  stop  to  discuss.  The 
difference  between  the  merits  of  the  wrorst  and  the 
best  system  that  could  be  devised  is  but  a  drop  in 
the  bucket,  compared  with  the  interests  affected  di 
rectly  by  the  making  of  notes  a  legal  tender.  All 
that  our  banks  can  do  is  to  save  the  community 
some  $20,000,000  per  annum  interest  on  capital 
that  would  otherwise  be  unemployed,  and  it  is  not 
likely  that  the  best  system  will  save  $2,000,000 
more  than  the  worst ;  so  that  we  may  regard  $2,000,- 
000  a  year  as  the  extreme  measure  of  the  benefit 
which  the  community  can  gain  by  the  introduction 
of  the  best  possible  system  of  banking.  But  we 
have  seen- that  such  a  change  in  the  value  of  legal 
tender  notes  as  frequently  takes  place  in  a  single 
week,  may  cause  property  to  the  amount  of  $50,- 


204  THE   NATIONAL   BANKING    SYSTEM. 

000,000  or  even  $100,000,000  to  be  gained  and  lost. 
Considered  simply  as  an  improved  system  of  curren 
cy  and  banking,  then  the  new  measure  would  scarce 
ly  have  received  attention  alongside  of  interests  so 
vastly  greater.  It  was  supported  almost  entirely  on 
the  ground  of  its  beneficial  influence  on  the  gov 
ernment  finances,  and  it  is  this  influence  which  it  is 
proposed  to  discuss  in  the  present  chapter. 

The  idea  of  loaning  the  capital  of  a  bank  to  the 
Government  is  by  no  means  a  new  one.  When  the 
Bank  of  England  was  first  chartered,  the  entire  cap 
ital  was  loaned  the  British  Government.  As  the 
capital  was  increased  from  time  to  time  it  was  im 
mediately  disposed  of  in  the  same  way,  sometimes 
at  a  very  low  rate  of  interest,  and  on  some  occasions 
even  free  of  interest.  If  I  am  not  mistaken,  there 
has  never  been  occasion  for  the  return  of  the  money 
thus  borrowed,  specie  payments  having  been  sus 
pended,  first  by  order  in  council  and  then  by  act  of 
Parliament,  at  the  only  time  when  a  necessity,  of 
the  repayment  seemed  imminent.  But  the  circum 
stances  under  which  our  National  banking  system 
was  inaugurated,  are  so  diiferent  from  those  of  the 
British  Government  at  the  time  referred  to,  that  we 
shall  only  be  deceived  by  any  attempt  to  justify  our 
action  by  the  example  of  theirs. 

Before  proceeding  with  the  examination  propos 
ed,  there  are  two  points  to  be  firmly  established 
respecting  which  great  indefiniteness  and  confusion 
of  ideas  seem  to  prevail.  There  are,  in  fact,  two 


THE   NATIONAL    BANKING    SYSTEM.  205 

great  illusions  which  our  policy  has  the  effect  to 
foster,  and  which  it  is  to  be  hoped  the  country  will 
speedily  be  rid  of.  They  are:  1.  That  everyone 
who  takes  notes  to  the  Treasury,  and  exchanges  them 
for  bonds,  lends  to  the  Government ;  2.  That  the  Na 
tional  currency  may  not  depreciate  the  legal  tender 
notes  as  much  as  an  additional  issue  of  legal  tender 
notes  to  the  same  amount. 

The  idea  that  any  one  who  takes  a  legal  tender 
note  to  the  Treasury,  and  exchanges  it  for  a  bond, 
lends  to  the  Government,  is  indeed  a  most  extraor 
dinary  one.  Nothing  can  more  strongly  illustrate 
the  illusions  of  habit  than  the  prevalence  of  this 
notion.  The  man  who  in  the  beginning  of  the  war 
gave  the  Government  gold,  and  the  man  who  now 
gives  the  Government  cannon,  shot,  and  shell,  re 
ceiving  in  exchange  a  note  promising  that  the 
"  United  States  will  pay ;"  these  are  the  men  who 
loan  to  the  Government.  The  debt  is  contracted 
when  the  cannon  is  received  and  the  note  issued, 
and  the  same  debt  cannot  be  contracted  twice.  The 
man  who  brings  the  note  to  exchange  for  a  bond 
only  changes  the  form  of  the  debt,  and  that  in  a 
way  greatly  to  the  disadvantage  of  the  Government, 
because  the  latter  then  has  to  pay  interest  equivalent 
to  10  or  15  per  cent,  on  the  market  value  of  the 
debt.  Clearly,  the  Government  has  no  reason  to  be 
anxious  for  such  an  exchange,  for  it  adds  nothing 
either  to  its  power  or  its  credit.  If  the  community 
prefer  notes  which  bear  no  interest  to  interest-bear- 


206  THE   NATIONAL    BANKING    SYSTEM. 

ing  bonds,  it  is  to  the  advantage  of  all  parties  to  let 
them  have  them  in  preference. 

It  may  be  replied  to  this  that  the  notes  were 
issued  with  the  understanding  that  they  were  con 
vertible  into  bonds  at  the  pleasure  of  the  holder, 
and  derive  a  large  part  of  their  value  from  this 
privilege ;  that  although  the  holder  of  the  note  may 
decline  availing  himself  of  the  privilege  for  a  day 
or  a  month,  yet  he  would  by  no  means  be  willing 
to  resign  it  altogether,  and  the  value  of  the  notes 
would  at  once  fall  if  he  were  deprived  of  it. 

This  is  very  true,  and  conclusively  shows  that 
the  Government  ought  to  eifect  the  conversion  when 
asked  to  do  so,  but  furnishes  no  reason  at  all  why 
it  should  wish  to  be  asked.  The  notes  are  in  fact 
redeemable  in  bonds  instead  of  coin,  and  therefore 
the  Government  ought  to  effect  the  so-called  re 
demption  for  the  same  reason  that  a  bank,  in  ordi 
nary  times,  redeems  its  notes  in  coin.  That  the 
bank  shall  be  willing  to  do  this  is  regarded  as  a 
matter  of  course,  but  if  it  should  establish  agencies 
throughout  the  country,  offering  inducements  to 
holders  of  its  notes  to  come  and  get  them  redeemed, 
the  sanity  of  its  directors  would  be  seriously  doubted. 

Yet  a  disposition  to  convert  notes  into  bonds 
does  indicate  a  state  of  things  favorable  to  the  pub 
lic  credit.  Let  us  see  how  : 

Every  legal  tender  note  has  two  elements  of 
value : 

1.  A  money  value,  in  virtue  of  which,  as  ex- 


THE   NATIONAL   BANKING    SYSTEM.  207 

plained  in  the  beginning  of  Chapter  V.,  the  sum 
total  of  the  circulation  must  be  worth  from  $200,- 
000,000  to  $300,000,000  in  gold.  If,  then,  the  total 
circulation  of  every  kind  were  kept  down  to  $250,- 
000,000,  any  serious  depreciation  would  be  impossi 
ble  ;  because,  if  any  general  rise  in  prices  should 
then  take  place,  there  would  not  be  money  enough 
to  transact  the  business  of  the  community  on  the  in 
creased  scale  of  prices :  the  money  market  would 
become  "  tight ; "  there  would  be  a  general  disposi 
tion  to  borrow  or  sett,  with  a  corresponding  inability 
to  lend  or  to  buy  •  and  prices  would  then  necessa 
rily  fall  until  the  pressure  was  relieved  and  the  equi 
librium  restored. 

Dividing  the  total  circulation  by  250,000,000, 
we  shall  have  the  maximum  price  which  gold  can 
permanently  command,  supposing  all  the  business 
of  the  country  to  go  on  as  usual.  The  circulation 
must  include  every  thing  used  as  money,  whether 
government  notes,  national  bank  notes,  state  bank 
notes,  or  hotel  checks. 

2.  The  legal  tender  notes  have  a  value  as  a  gov 
ernment  debt,  represented  by  that  of  the  bonds  into 
which  they  are  convertible,  or  dependent  on  the 
hope  that  they  Avill  at  some  time  be  redeemed  in 
coin.  When  their  value  as  debt  is  less  than  that  as 
money ,  there  will  be  no  conversion,  the  notes  being 
worth  more  than  the  bonds  into  which  they  are  con 
vertible,  because  the  latter  cannot  be  used  as  money. 
Such  is  the  very  simple  explanation  of  the  state  of 


208  THE   NATIONAL    BANKING    SYSTEM. 

things  in  the  winter  of  1863,  when  a  hundred  dol 
lar  bond  would  only  bring  ninety-three  dollars  in 
legal  tender  notes,  although  the  former  bore  6  per 
cent,  interest  in  coin,  and  the  notes  no  interest  at  all. 

When,  from  a  rise  in  government  credit,  the  debt 
value  exceeds  the  money  value,  the  notes  will  not 
all  remain  in  circulation  as  money,  but  will  be  kept 
here  and  there  by  individuals  for  the  purpose  of  be 
ing  converted  into  bonds,  or  in  hopes  the  Govern 
ment  will  provide  for  their  redemption. 

Now,  it  is  plain  that,  if  the  bonds  were  to  remain 
as  valuable  as  gold,  the  whole  issue  of  the  notes 
above  $250,000,000  or  perhaps  $300,000,000,  would 
come  back  to  be  exchanged  for  bonds  as  fast  as  is 
sued.  This  rapidity  of  conversion,  this  continual 
demand  for  bonds,  would  indicate,  but  not  cause,  a 
state  of  things  highly  favorable  to  government  credit, 
just  as  a  high  thermometer  indicates  a  warm  atmos 
phere,  but  does  not  cause  it.  It  would  not  be  the 
demand  for  bonds  which  caused  them  to  be  valua 
ble,  but  their  value  would  cause  the  demand.  'Now, 
if  not  satisfied  with  the  natural  demand  for  the 
bonds,  we  use  artificial  means  to  stimulate  it,  we 
act  on  the  same  principles  with  the  attendant  in  a 
sick-room,  who,  being  ordered  to  keep  the  thermom 
eter  at  a  certain  height,  effected  the  object  by  bring 
ing  the  thermometer  nearer  and  nearer  the  grate  as 
the  fire  w^ent  out. 

Thus,  in  whatever  way  we  approach  the  matter, 
we  arrive  at  the  conclusion  hinted  at  in  the  last 


THE   NATIONAL   BANKING    SYSTEM.  209 

chapter,  that  it  is  the  gold  value  of  the  bonds  in 
which  our  notes  are  to  be  redeemed  to  which  atten 
tion  should  be  directed ;  and  that,  wlien  this  is  as 
certained,  the  notes  may  be  safely  left  to  come  in  of 
themselves. 

It  can  scarcely  be  necessary  to  go  into  a  long  ar 
gument  to  prove  that  the  $300,000,000  of  author 
ized  national  bank  notes  must  depreciate  the  curren 
cy  as  much  as  the  issue  of  an  equal  amount  of  legal 
tender  notes.  True,  the  National  Bank  money  may 
be  redeemed  in  legal  tender  notes,  but  this  does  not 
prevent  them  from  competing  with  each  other.  In 
deed,  under  our  present  policy,  the  law  which  pro 
vides  for  redemption  provides  for  a  mere  farce.  The 
paper  in  which  the  bills  are  to  be  redeemed  will  an 
swer  no  end  which  the  bill  itself  will  not  equally 
answer.  If  the  bill  were  redeemable  in  gold,  a 
holder  might  present  a  bill  for  redemption  either 
because  he  wishes  to  keep  the  money  and  considers 
the  coin  more  secure  than  the  bill ;  because  he 
wishes  to  take  or  send  the  gold  to  some  place  in 
which  the  bill  will  not  pass  ;  because  he  wishes  to 
make  payments  to  the  Government ;  or  because  he 
intends  to  use  the  gold  in  manufactures.  None  of 
these  reasons  can  be  assigned  for  preferring  a  legal 
tender  note  to  a  National  Bank  bill.  The  latter  are 
as  secure  as  the  former ;  they  will  be  received  at  par 
in  every  place  where  legal  tender  notes  will ;  they 
are  received  and  paid  out  by  the  Government  in  the 
same  way  ;  and  the  "  lawful  money  "  in  which  they 


210  THE   NATIONAL   BANKING   SYSTEM. 

are  redeemable  cannot  be  made  into  jewelry.  Thus 
the  redeemableness  of  the  national  currency  does 
not  tend  in  the  least  to  diminish  the  volume  of  it  in 
circulation ;  and  it  is  the  actual  volume  of  the  en 
tire  mass  of  currency,  and  not  the  convertibility  of 
one  part  of  the  mass  into  another,  which  determines 
the  depreciation  of  the  whole.  If  this  were  not  so, 
the  Government  would  have  at  command  a  very 
simple  way  of  preventing  the  depreciation  of  its 
money.  It  would  only  be  necessary  to  reduce  the 
amount  of  outstanding  legal  tender  notes  to  $250,- 
000,000,  and  issue  in  place  of  the  remainder  de 
mand  notes  not  themselves  legal  tender,  but  redeem 
able  in  legal  tender  notes  on  demand.  These  notes 
would  be  precisely  like  the  National  Bank  notes,  ex 
cept  that  they  would  be  redeemable  at  the  Treasury 
instead  of  the  bank.  They  could  be  issued  to  any 
extent  without  serious  danger  of  coming  back  for 
redemption  ;  and  if  the  National  Bank  notes  do  not 
depreciate  the  currency,  neither  would  they. 

We  have  had  many  complaints  of  the  deprecia 
tion  of  the  currency  by  the  State  Bank  notes,  but  it 
does  not  seem  to  occur  to  the  authors  of  these  com 
plaints  that  the  National  Bank  notes  are  equally  per 
nicious  in  their  influence.  The  latter  are  even  more 
pernicious,  because,  in  making  them  payable  to  and 
from  the  Government,  every  thing  that  could  be 
done  was  done  to  enable  them  to  compete  with  the 
Government's  own  notes. 

All  parties  agree  that  an  increase  of  the  currency 


THE   NATIONAL   BANKING   SYSTEM.  211 

is  an  evil.  When,  then,  a  measure  was  proposed, 
the  consummation  of  which  would  add  $300,000,000 
to  an  already  expanded  currency,  we  should  natu 
rally  expect  it  to  be  looked  on  with  suspicion.  We 
should  expect  to  find  every  one  eagerly  inquiring 
what  benefit  the  Government  would  derive  from  the 
measure  to  compensate  for  so  great  an  addition  to 
an  evil  of  already  alarming  magnitude.  We  should 
have  expected  the  proposers  of  the  measure,  antici 
pating  such  inquiries,  to  have  presented  a  careful 
examination  of  its  effect  on  the  volume  of  the  cur 
rency,  the  resources  of  the  Government,  and  the 
burden  of  the  public  debt.  We  should,  in  fact,  have 
expected  a  balance-sheet,  showing  exactly  what 
means  would  thus  have  been  placed  at  the  disposal 
of  the  Government,  and  the  cost  at  which  these 
means  would  be  attained.  If  we  examine  the  offi 
cial  documents  of  Congress  with  a  view  to  find  such 
an  exposition  from  the  friends  of  the  measure,  we 
shall  be  disappointed.  Many  of  the  reasons  assigned 
had  so  little  connection  with  the  measures  in  ques 
tion,  that  they  might  as  well  have  been  assigned  as 
reasons  for  reenacting  the  fugitive  slave  law.  Of 
reasons  really  bearing  on  the  measure,  and  of  suffi 
cient  cogency  to  merit  consideration,  only  two  were 
urged,  and  these  two  form  the  great  foundation  of 
its  support.  The  first  of  them  is,  "  That  the  people 
want  a  uniform  currency  which  will  be  at  par  every 
where,  and  which  will  be  receivable  for  public  as  well 
as  private  debts." 


212  THE   NATIONAL    BANKING    SYSTEM. 

To  answer  this  it  is  only  necessary  to  refer  to  the 
notorious  fact  that  the  people  then  had,  have  now, 
and  are  likely  to  have  for  years  to  come,  just  such  a 
currency  in  such  inconvenient  quantity  that  its  value 
has  fallen  to  one-half.  From  the  very  nature  of  the 
case  greenbacks  must  be  nominally  at  par  every 
where,  and  of  equal  value  everywhere,  because  they 
are  a  legal  tender  ;  and  they  are  receivable  for  pub 
lic  as  well  as  private  debts.  The  enormous  fluctua 
tions  in  their  real  value  are  indeed  a  most  crying 
evil,  but  the  currency  proposed  is  necessarily  subject 
to  the  same  evil  as  long  as  it  exists,  and  indeed  must 
exaggerate  it.  Thus  the  argument  in  question  is 
like  proposing  to  add  more  water  to  a  stream  which 
is  inundating  a  city,  in  order  that  the  inhabitants 
may  have  water  to  drink. 

The  great  argument  in  favor  of  the  measure  was, 
that  it  would  support  the  public  credit  and  create  a 
demand  for  government  bonds.  To  this  effect  the 
Honorable  Secretary  of  the  Treasury  writes : 

"  The  Secretary  has  already  mentioned  the  sup 
port  to  public  credit  which  may  be  expected  from 
the  proposed  associations.  The  importance  of  this 
point  may  excuse  some  additional  observations. 

"  The  organizations  proposed,  if  sanctioned  by 
Congress,  would  require  within  a  very  few  years,  for 
deposit  as  security  for  circulation,  bonds  of  the 
United  States  to  an  amount  not  less  than  $250,000,- 
000.  It  may  well  be  expected,  indeed,  since  the 
circulation  by  uniformity  in  credit  and  value  and 


THE   NATIONAL   BANKING    SYSTEM.  213 

capacity  of  quick  and  cheap  transportation  will  be 
likely  to  be  used  more  extensively  than  any  hitherto 
issued,  that  the  demand  for  bonds  will  overpass  the 
limit.  *  *  A  steady  market  for  the  bonds  would 
thus  be  established,  and  the  negotiation  of  them 
greatly  facilitafed." 

To  this  it  is  sufficient  to  reply,  that  it  depends 
altogether  on  the  terms  of  demand  whether  it  is 
beneficial  to  the  seller  of  an  article.  It  is  quite 
possible  for  a  tradesman  to  create  a  demand  for  his 
wares  by  offering  them  on  terms  so  favorable  to  the 
purchaser  that  he  is  himself  a  loser  by  the  demand. 
In  the  case  of  the  Government  we  want  to  know 
not  only  that  the  Government  sells  the  bonds,  but 
also  want  to  know  what  privileges  it  sells  with  them, 
and  what  it  receives  in  exchange  for  bonds  and  priv 
ileges.  What  do  the  organizations  give  the  Gov 
ernment  for  the  bonds?  Gold?  No!  Gunpow 
der  ?  No  !  Any  thing  of  use  in  carrying  on  the 
war  ?  No  !  They  give  only  the  Government's  own 
notes.  They  simply  exchange  a  debt  which  does 
not  bear  interest  for  one  which  does.  If  they  paid 
for  the  bonds  in  gold  at  par,  there  would  be  some 
foundation  for  the  idea  that  the  demand  for  the 
bonds  was  beneficial  to  the  Government ;  under  the 
actual  circumstances  there  is  none. 

The  Government  grants  the  banks  valuable  priv 
ileges  with  the  bonds ;  namely,  the  privilege  of  is 
suing  notes  to  circulate  as  money.  To  appreciate 
the  cost  of  this  grant  to  the  Government,  we  must 


214:  THE   NATIONAL   BANKING   SYSTEM. 

revert  to  what  we  have  just  shown : .  that  the  sole 
advantage  of  an  exchange  of  legal  tender  notes  for 
bonds  is  found  in  the  consequent  diminution  of  the 
currency,  thereby  making  room  for  the  Government 
to  issue  the  notes.  But,  when  the  exchange  is  made 
by  a  National  Bank,  the  Government  supplies  the 
bank  with  circulating  notes  to  the  amount  of  nine- 
tenths  the  value  of  the  bonds  deposited,  thus  re 
signing  nine-tenths  of  the  sole  advantage  gained 
from  the  organization  ! 

We  may  now  proceed  to  a  more  exact  examina 
tion  of  the  effects  of  the  National  Banking  system 
upon  the  volume  of  the  currency  and  Government 
indebtedness.  To  give  the  best  case  possible  to  the 
supporters  of  the  new  system,  we  will  admit  that 
the  legal  tender  notes  are  money,  that  the  Govern 
ment  must  raise  $300,000,000  of  this  money  to  pay 
its  creditors,  and  that  national  banking  associations 
have  this  entire  amount  all  ready  to  pay  into  the 
Treasury  for  bonds.  To  make  the  case  stronger 
still,  suppose  that  the  Government  has  no  alterna 
tive  but  the  issue  of  $300,000,000  of  legal  tender 
notes,  in  addition  to  those  already  issued.  Every 
one  admits  that  this  would  be  a  very  bad  way  of 
meeting  the  difficulty,  so  bad  as  to  be  totally  unjusti 
fiable,  except  in  case  of  the  most  urgent  necessity. 
Will  it  be  best,  I  ask,  to  have  recourse  to  the  print 
ing-press  for  the  requisite  notes,  or  to  accept  the 
offer  of  the  National  Banks  ?  Let  us  see : 

There  are  already  in  circulation,  we  will  suppose, 


THE   NATIONAL   BANKING   SYSTEM.  215 

$500,000,000  in  legal  tender  notes.  Only  $250,- 
000,000  being  actually  needed  for  money,  the  gold 
value  of  the  notes,  as  money ,  will  be  fifty  cents  on 
the  dollar.  If  the  Government  decides  to  obtain 
the  $300,000,000  required  for  its  expenses  by  the 
formation  of  banks,  the  process  will  be  as  follows : 
The  banks  pay  the  Government  this  amount  of 
money,  receiving  in  exchange  therefor  five  per  cent, 
bonds,  interest  payable  in  gold.  At  the  same  time 
the  Government  supplies  the  banks  with  "  National 
currency"  to  the  amount  of  $270,000,000  to  cir 
culate  as  money.  After  the  Government  has  paid 
out  the  money  obtained  from  the  banks,  we  shall 
have  the  entire  $500,000,000  of  legal  tender  notes 
once  more  in  circulation,  and  $270,000,000  of  bank 
money  in  addition,  making  a  total  of  $770,000,000. 
So  the  effects  of  the  measure  are  summed  up  as  fol 
lows  : 

The  principal  of  the  public  debt  is  increased  by 
$300,000,000,  which  has  taken  the  form  of  bonds 
deposited  with  the  Treasurer  of  the  United  States. 

The  annual  interest  is  increased  by  $15,000,000 
in  gold,  which,  with  gold  at  200,  would  be  equiva 
lent  to  $30,000,000  in  currency. 

The  currency  having  been  increased  to  $770,- 
000,000,  its  gold  value  as  money  remaining  at  $250,- 
000,000,  each  dollar  as  money  is  worth  thirty-three 
cents  in  gold ;  that  is,  it  has  fallen  seventeen  per 
cent,  on  its  par  value,  and  thirty-four  per  cent,  on 
its  real  value. 


THE   NATIONAL    BANKING    SYSTEM. 

To  look  at  the  other  alternative :  had  the  money 
been  obtained  by  a 'new  issue  of  notes,  the  effect 
would  have  been  as  follows : 

The  principal  of  the  public  debt  would  have 
been  increased  by  $300,000,000,  the  same  as  in 
the  other  case ;  but  this  increase  would  have  been 
in  the  form  of  notes  bearing  no  interest. 

The  annual  interest  would  not  have  been  increas 
ed  at  all. 

The  total  circulation  would  have  been  increased 
to  $800,000,000  instead,  of  $770,000,000  as  by  the 
National  Bank  plan. 

Thus,  the  only  effect  of  the  National  Banking 
system  is  to  increase  the  interest  on  the  public  debt 
by  $15,000,000  in  coin,  in  consideration  of  a  dimi 
nution  of  the  currency  by  $30,000,000 ;  in  a  word, 
it  is  equivalent  to  borrowing  $30,000,000  in  cur 
rency  at  fifty  per  cent,  interest,  payable  in  coin ! 
And  this  as  compared  with  the  confessedly  very 
objectionable  policy  of  an  indefinite  issue  of  legal 
tender  notes ! 

How  could  such  a  measure  ever  be  considered  as 
beneficial  to  the  public  credit  ?  Two  reasons  may 
be  found  for  this  view.  One  of  them  we  have 
already  referred  to.  The  measure  was  never  criti 
cally  examined  on  its  own  merits.  Legislators  voted 
for  it,  because  it  was  vaguely  said  to  be  the  opinion 
of  men  qualified  to  judge,  that  the  measure  would 
benefit  the  public  credit.  It  does  not  seem  that 
any  of  the  authorities  in  question,  except  the  Hon- 


THE   NATIONAL    BANKING    SYSTEM.  217 

or  able  Secretary  of  the  Treasury,  were  ever  called 
upon  to  show,  to  the  satisfaction  of  the  Legislature, 
in  what  way  this  benefit  would  be  attained. 

Again,  the  financial  authorities  who  supported 
the  measure,  forgot  to  take  into  account  the  great 
change  of  policy  necessitated  by  the  different  cir 
cumstances  in  which  the  Government  was  placed 
on  the  suspension  of  specie  payments,  and  the  sub 
stitution  of  United  States  notes  for  specie.  In  fact, 
the  reasons  of  the  Honorable  Secretary  set  forth  in 
his  first  annual  report,  made  before  the  suspension 
of  specie  payments,  were  perfectly  sound.  He  there 
depicted  the  evils  of  a  circulation  of  government 
notes,  and  the  advantages  to  the  government  credit 
of  the  proposed  banking  system.  Were  the  Gov 
ernment  really  going  to  refrain  from  an  issue  of 
notes,  and  were  gold  to  remain  the  only  lawful 
money ,  then  the  measure  would  have  been  highly 
advantageous  to  the  Government.  Remembering 
that  the  two  great  operations  of  the  system  are  as 
follows : 

1.  The  bank  loans  its  capital,  in  lawful  money, 
to  the  Government; 

2.  The  Government  allows  the  bank  to  issue  cir 
culating  notes  amounting  to  nine-tenths  of  the  capi 
tal  thus  loaned ; 

It  will  be  understood  that  if  this  lawful  money 
is  gold  coin,  the  bank  actually  makes  a  loan  to  the 
Government ;  whereas  if  the  money  is  only  the  Gov 
ernment's  own  notes,  no  such  loan  is  made. 
10 


218  THE   NATIONAL   BANKING   SYSTEM. 

Again,  in  the  former  case,  the  value  of •  the  coin 
received  by  the  Government  is  not  sensibly  depre 
ciated  by  the  notes  which  the  bank  is  allowed  to 
circulate,  because  gold  can  be  put  to  uses  which  the 
bank  notes  cannot ;  whereas  if  the  Government  re 
ceives  nothing  but  paper,  the  value  of  this  paper  is 
depreciated  at  the  \7ery  time  of  receiving  it  by  the 
privilege  granted  the  bank  of  circulating  notes. 

Had  it  not  been  for  this  oversight,  we  cannot 
but  suppose  that  it  would  have  occurred  to  the  sup 
porters  of  the  measure,  that  it  was  designed  to  avoid 
certain  evils,  viz. :  those  flowing  from  a  government 
currency ;  and  -that  after  all  those  evils  had  been 
accepted  to  their  utmost  extent  as  fixed  and  inevita 
ble,  the  reasons  in  favor  of  the  plan  vanished. 

If  it  has  not  been  proved  to  the  satisfaction  of 
every  unprejudiced  reader  that,  under  the  peculiar 
circumstances  in  which  we  are  now  placed,  the 
National  Banking  system  is  most  deleterious  to  the 
financial  interests  of  the  Government,  let  us  view  it 
from  other  stand-points,  and  see  how  every  complete 
examination  of  the  financial  operations  involved  in 
it  leads  to  the  same,  conclusion. 

The  law  forbids  banks  from  using  their  circulat 
ing  notes  to  increase  their  capital.  If  the  effects 
of  the  law  are  really  beneficial,  this  interdiction  is 
much  to  be  regretted,  because  it  prevents  the  Gov 
ernment  from  reaping  those  benefits  as  rapidly  as  it 
otherwise  might.  Let  us  see  how  rapidly  the  Gov 
ernment  might  otherwise  raise  money.  A  National 


THE   NATIONAL   BANKING   SYSTEM.  219 

Bank  is 'organized  with  a  capital  of,  say,  $100,000. 
This  amount  it  pays  into  the  Treasury  for  bonds, 
deposits  the  bonds  with  the  Treasurer  as  required, 
and  receives  $90,000  of  National  currency,  for  the 
redemption  of  which  in  greenbacks  it  is  responsible. 
This  currency,  when  properly  signed,  is  in  every 
respect  as  valuable  to  the  Government  as  legal  ten 
der  notes,  because  it  is  payable  by  the  Government 
in  all  cases  where  legal  tender  notes  are.  If,  then, 
the  bank  could  loan  the  Government  these  notes  as 
an  increase  of  capital,  it  would  confer  the  same 
benefit  that  would  be  conferred  by  a  new  bank 
with  $90,000  capital.  The  Government  would 
then  allow  the  bank  to  issue  $81,000  of  fresh  notes, 
which  the  bank  would  again  loan  the  Govern 
ment.  This  process  might  be  continued  until  the 
Government  had  received  $900,000  from  the  bank, 
viz.  :  $100,000  in  lawful  money,  and  $800,000 
in  bank  currency,  which  it  can  pay  out  to  public 
creditors.  Every  thing  will  then  be  the  same  as  if 
the  bank  had  been  originally  chartered  with  a  capi 
tal  of  $900,000.  The  notes  will  be  equally  secure, 
because  bonds  to  the  amount  of  $889,000  are  de 
posited  as  security  for  their  redemption.  Then  why 
is  it  that  this  operation  was  interdicted  ?  It  is  quite 
plain  that  in  the  case  supposed  the  stockholders,  by 
an  actual  expenditure  of  only  $100,000,  would  draw 
interest  in  coin  on  $989,000  just  as  long  as  their 
notes  remained  in  circulation ;  that  is,  as  long  as 
they  were  redeemable  in  paper  no  more  valuable 


220  THE   NATIONAL   BANKING    SYSTEM. 

than  themselves.  We  may  presume  that  if  was  not 
considered  desirable  to  allow  the  banks  to  support 
the  public  credit  in  a  way  so  highly  advantageous 
to  themselves. 

Now,  I  ask,  would  this  operation  have  benefited 
the  Government,  and  supported  the  public  credit  ? 
If  it  would  not,  neither  would  the  formation  of  any 
number  of  National  banks,  for  we  have  shown  that 
the  Government  is  benefited  in  the  same  way,  and 
to  the  same  degree,  in  either  case.  If  it  would, 
patriotism  has  been  prevented  from  reaping  a  rich 
reward  by  the  injudicious  prohibition. 

To  view  the  system  from  yet  another  point: 
every  National  Bank  note  in  circulation  may  be 
considered  as  representing  a  bond  deposited  with 
the  Treasurer  of  the  United  States.  The  note  is, 
indirectly,  a  Government  debt :  the  bank  owes  the 
holder  of  the  note ;  the  Government  owes  the  bank. 
The  Government  pays  interest  on  the  debt,  not  to 
the  holder  of  the  note,  but  to  the  bank.  But  the 
holder  can  present  his  note  at  the  Treasury,  and 
receive  an  interest-bearing  Government  bond  in  ex 
change  therefor,  although  the  Government  is  already 
paying  interest  on  the  debt  represented  by  the 
note ! 

Can  we  not  apply  to  this  last  operation  the  ob 
jections  of  the  Honorable  Secretary  to  receiving  the 
notes  of  State  banks  in  suspension  in  payment  for 
loans  ?  "  Loans  negotiated  in  this  circulation,"  he 
says,  "  would  be  simply  exchanges  of  the  debts  of 


THE   NATIONAL   BANKING   SYSTEM.  221 

the  nation,  bearing  interest,  and  certain  to  be  paid, 
for  the  debts  of  a  multitude  of  corporations  bearing 
no  interest,  and  certain,  in  part,  never  to  be  paid." 
Of  loans  by  the  Government  of  National  currency 
we  may  say  with  equal  force,  that  they  are  ex 
changes  of  the  debts  of  the  nation  bearing  interest 
for  the  debts  of  corporations  bearing  no  interest, 
whose  only  security  is  found  in  the  guarantee  of  the 
Government  itself. 

The  National  banks  are  also  supported  on  the 
ground  that  they  are  fiscal  agents  of  the  Govern 
ment.  Considering  that  their  principal  business  as 
fiscal  agents  is  to  stimulate  and  facilitate  the  con 
version  of  notes  into  bonds  bearing  fifteen  per  cent, 
interest  on  the  value  which  the  Government  gets 
in  exchange  for  them,  it  may  well  be  doubted 
whether  the  Government  can  afford  to  pay  $40,- 
000,000  a  year  for  their  services.  If  they  could 
make  beef  and  clothing,  shot  and  shell,  for  the  army, 
they  would  be  of  some  benefit  as  agents ;  as  things 
actually  are,  they  are  of  none. 

The  only  banks  which  really  negotiated  a  loan 
for  the  Government  since  the  beginning  of  the  war, 
were  the  old  State  banks.  They  secured  the  pay 
ment  into  the  Treasury  of  about  8141,000,000  in 
coin  during  the  year  1861.  Again,  at  the  end  of 
1862,  when  the  Government  needed  coin  to  pay 
the  debt  of  1842,  the  same  banks  came  forward  and 
loaned  the  gold  at  four  per  cent,  interest.  Since 


222  THE   NATIONAL   BANKING   SYSTEM. 

that  time  the  Government  has  never  attempted  to 
borrow  coin  on  any  terms. 

In  conclusion,  although  the  National  banks  are 
most  excellent  investments  for  the  stockholders  if 
every  thing  goes  on  smoothly,  they  are  productive 
of  nothing  but  mischief  to  the  finances  of  the  Gov 
ernment.  But  this  mischief  is  of  a  different  char 
acter  from  that  of  the  legal  tender  notes.  In  is 
suing  the  latter  we  did  indeed  purchase  a  temporary 
relief,  though  at  the  expense  of  evils  ^  which  will  be 
felt  for  a  generation  to  come.  In  the  National 
Banking  system  we  pay  enormously  for  what  is  an 
unmitigated  evil  from  the  very  beginning,  with  no 
benefit  of  any  kind  to  counterbalance  it.  But  this 
evil  is  not  of  the  incurable  character  of  the  other. 
It  will  be  practically  removed  whenever  we  make 
the  banks  pay  the  same  price  for  the  privilege  of 
expanding  the  circulation  which  the  Government  is 
obliged  to  pay  for  contracting  it. 


THE    END. 


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gational  Society,  Boston.  By  JOHN  WEISS.  With  two  Por 
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Lf 


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Practice   in  the  Executive  De- 

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ties  which  he  encounters.  *******  Dr.  Tyndall's  is 
the  first  work  in  which  the  undulatory  or  mechanical  theory  of  heat  has  been 
placed  in  a  popular  light ;  but  wo  are  sure  that  no  one,  however  profound  his 
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Life  of  Edward  Livingston, 

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Thirty  Poems. 

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7vw 


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An   Introduction  to    Municipal  j 

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Thackeray ; 


The  Humorist  and  Man  of  Letters,  the  Story  of  his  Life,  with 
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The  Iron  Manufacture  of  Great 

Britain.  Theoretically  and  Practically  considered :  Including 
Descriptive  Details  of  the  Ores,  Fuels,  and  Fluxes  employed  ; 
the  Preliminary  Operation  of  Calcination ;  the  Blast,  Refining, 
and  Puddling  Furnaces;  Engines  and  Machinery;  and  the 
Various  Processes  in  Union,  etc.,  etc.  By  W.  TRURAN,  C.  E., 
formerly  Engineer  at  the  Dowlais  Iron  Works,  under  the  late 
Sir  John  Guest,  Bart.  Second  Edition,  revised  from  the 
manuscripts  of  the  late  Mr.  Truran,  by  J.  ARTHUR  PHILLIPS, 
Author  of  "  A  Manual  rf  Metallurgy,"  "  Records  of  Mining," 
etc.,  and  WM.  H.  DORMAX.  One  vol.,  imperial  8vo.  Con 
taining  84  Plates. 


D.  APPLETON  &  CO.'S  PUBLICATIONS 

Principles  of  Political  Economy. 

With  some  of  their  Applications  of  Social  Philosophy.     By  JOHN 
STUART  MILL.  2  vols.,  8vo.  Printed  on  tinted  paper. 

"  In  the  whole  range  of  extant  authorship  on  political  economy,  there  is 
no  writer  except  Adam  Smith  with  whom  John  Stuart  Mill  can,  without  in 
justice,  be  compared.  In  originality,  Adam  Smith,  as  being  the  acknowl 
edged  father  of  the  science,  takes  the  precedence,  as  he  does  also  in  exuber 
ance  of  apt  illustration.  But  in  rectitude  of  understanding,  clearness  and 
sagacity,  Mill  is  fully  his  peer  ;  in  precision  of  method,  range  of  topics,  and 
adaptation  to  the  present  state  of  society,  he  is  altogether  his  superior.  The 
'  Wealth  of  Nations '  now  belongs,  indeed,  rather  to  the  history  of  the  science 
than  to  its  exposition.  But  the  '  Principles  of  Political  Economy '  is  an  orderly, 
symmetrical,  and  lucid  exposition  of  the  science  in  its  present  advanced  state. 
In  extent  of  information,  tyeadth  of  treatment,  pertinence  of  fresh  illustra 
tion,  and  accommodation  to  the  present  wants  of  the  statesman,  the  mer 
chant,  and  the  social  philosopher,  this  work  is  unrivalled.  It  is  written  in  a 
luminous  and  smooth,  yet  clear-cut  style  ;  and  there  is  diffused  over  it  a  soft 
atmosphere  of  feeling,  derived  from  the  author's  unaffected  humanity  and 
enlightened  interest  in  the  welfare  of  the  masses." 

The  New  American  Cyclopaedia. 

Edited  by  GEORGE  RIPLEY  and  CHARLES  A.  DANA.    Now  com 
plete,  in   16  vols.,  8vo.,  double   columns,   750  pages  each. 


The  leading  claims  to  public  consideration  which  the  New  American  Cy 
clopaedia  possesses  may  be  thus  briefly  stated  : 

"  1.  It  surpasses  all  other  works  in  the  fullness  and  ability  of  the  articles 
relating  to  the  United  States. 

"  2.  No  other  work  contains  so  many  reliable  biographies  of  the  leading 
men  of  this  and  other  nations.  In  this  respect  it  is  far  superior  even  to  the 
more  bulky  Encyclopaedia  Britannica. 

"  3.  The  best  minds  in  this  country  have  been  employed  in  enriching  its 
pages  with  the  latest  data,  and  the  most  recent  discoveries  in  every  branch  of 
manufactures,  mechanics,  and  general  science. 

"4.  It  is  a  library  in  itself,  where  every  topic  is  treated,  and  where  in 
formation  can  be  gleaned  which  will  enable  a  student,  if  he  is  so  disposed,  to 
consult  other  authorities,  thus  affording  him  an  invaluable  key  to  knowledge. 

"  5.  It  is  neatly  printed,  with  readable  type,  on  good  paper,  and  contains 
a  most  copious  index. 

"  6.  It  is  the  only  work  which  gives  anything  approaching  correct  descrip 
tions  of  cities  and  towns  of  America,  or  embraces  reliable  statistics  showing 
the  wonderful  growth  of  all  suctions." 

Queen  Mab. 

A  New  Novel.  By  JIT,IA  KAVANAGH.  1  vol.,  12mo. 

':  Xo  English  novelist  of  the  present  day  ought,  to  hold,  we  think,  \  higher 
rank  in  her  own  peculiar  walk  of  literature  than  Miss  Kavanagh.  There  is  a 
freshness  of  originality  about  all  her  works,  and  an  individual  character 

i  stamped  on  each,— there  is,  moreover,  a  unity  of  thought  and  feeling,  a  har 
mony,  HO  to  speak,  pervading  each  separate  work,  that  plainly  speaks  original 

!  genius,  while  the  womanly  grace  of  her  etchings  of  character,  is  a  marvel  of 
artistic  excellence."—  Tablet. 


, 


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